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Risk curators

Introduction

Risk curators are entities that help manage risks on Euler vaults. The mechanism through which they curate risk depends on the types of vault they govern. Credit vaults require risk curators to actively manage risk parameters. Earn vaults require risk curators to actively manage allocations of user deposits into different lower-level yield strategies.

Risk curation on credit vaults

Risk to depositors in credit vaults emerges when borrowing is enabled. The primary goal of the risk curator is to try to ensure that borrowers from the vault always remain over-collateralised and therefore incentivised to repay in full at all times. They can achieve this by setting and managing a variety of risk parameters on the credit vaults they govern.

Choosing collateral​

Risk curators choose which collateral will be accepted for borrowing from a credit vault. Good quality collateral for borrowing is generally something that is liquid, so that it can easily be liquidated in times of distress, and/or relatively correlated in price with the asset being borrowed, so that the likelihood volatile market conditions brings borrowers into a state of under-collateralisation is limited. Improper collateral selection can expose depositors to bad debt risks if the underlying assets become unpriceable or fail to liquidate.

Setting loan-to-value ratios (LTVs)​

Once collateral assets are known, curators must set LTVs for each collateral asset, defining how much can be borrowed against it. There are two primary types of LTV to set:

  • Max LTV – The maximum amount a user can borrow when taking out a loan.
  • Liquidation LTV (LLTV) – Determines when a position becomes eligible for liquidation.

The LLTV is often set higher than the Max LTV meaning that loans will generally not be liquidated immediately even if borrowers take out maximum loans and prices move straight away.

LTVs should be chosen carefully. If the collateral itself can be loaned out against risky collateral or uses unsafe pricing oracles, lower LTVs may be appropriate.

LTV ramping to adjust LTV ratios over time​

Risk curators can adjust LTV ratios over time in response to changing economic circumstances, but sudden reductions may push borrowers into immediate liquidation. To prevent unfair losses, LTV ramps gradually decrease the liquidation LTV over a set duration, allowing for smoother risk adjustments. The risk curator can choose how fast LTVs change over time.

Selecting oracles and a pricing mechanism​

Risk curators not only select which collateral assets can be used to borrow from a vault, but also determine how they are valued i.e. which pricing mechanism is used. To ensure borrowers remain over-collateralised at all times, collateral and debt assets need to be converted into the same units for comparison.

The most common unit of account for pricing collateral and debt is USD, but ETH and other units of account may be more appropriate depending on the assets involved. Oracles must then be chosen to value the collateral and debt in terms of the unit of account so that Euler can keep check on the health of a user's account. Euler is agnostic about which oracles are used. A variety of pricing providers are available (including Chainlink, Pyth, Redstone, Chronicle, and API3), and risk curators can opt for both push and pull-based systems.

Supply and Borrow Caps​

Risk exposure of collateral is always a relative measure. Volatile or illiquid assets may make suitable collateral in some circumstances if the total amount of borrowing against them can be controlled. Risk curators can control how much exposure a given collateral contributes by setting caps:

  • Supply caps – Limits on how much of an asset can be deposited.
  • Borrow caps – Limits on how much can be borrowed.

Caps prevent overexposure but can transiently be exceeded within a transaction batch. If exceeded at the start of a batch, only transactions that reduce violations are allowed.

Interest rates

Risk curators also choose which type of interest rate model are used to price the cost of borrowing. Curators can choose a classic linear kink model, and its parameters, or opt for a reactive rate model, which can operate more autonomously without regular governance inervention as the economic environment shifts.

Hooks for advanced controls​

Risk curators can add opt to apply additional custom rules and restrictions on vault operations through the use of hooks. Use cases of hooks include:

  • Pause Guardian – Allows risk curator to pause vault actions during crises.
  • Permissioned vaults – Allows risk curator to restricts deposits and borrowing to approved users.
  • Flash Loan Fees – Allows risk curators to enforce fees on flash loans.
  • Utilisation caps – Allows risk curators to prevent excessive borrowing from depleting liquidity.

Security​

It is important to note that while risk curators can alter risk parameters on credit vaults, and they do not have the authority to withdraw user funds, ensuring that depositors maintain control over their assets (vaults are non-custodial). However, poorly chosen risk parameters can expose depositors to greater risk of bad debt. A poorly chosen collateral asset or LTV or oracle could enable all assets in a credit vault to be borrowed with no hope for repayment, for example. Ultimately users therefore place a degree of trust in risk curators to manage risks on their behalf through their control over risk parameters.

Risk curation on Earn vaults

For Earn vaults, risk curators are responsible for creating and managing vaults that allocate user deposits across various credit vaults on Euler and other external yield-bearing products. Risk to depositors in Earn vaults primarily emerges from the balance of yield strategies the vault is configuered to deploy to.

Their primary responsibilities include:

  • Rebalancing: Risk curators have the authority to enable or disable specific yield-bearing vaults, thereby influencing which yield opportunities are available to users.
  • Liquidity management: They determine the order in which markets receive supply and handle withdrawals, directly affecting returns and liquidity for suppliers.
  • Risk assessment: Curators continuously monitor and assess the risk profiles of their vaults, making strategic adjustments to market allocations to optimize risk-adjusted yields.
  • User protection: By imposing timelocks on critical operations, such as changing market parameters or roles, curators provide users with a window to react to potential changes, enhancing the security and trustworthiness of the vaults.

In essence, risk curators serve as the primary intermediaries between passive lenders and yield-bearing products, both internal to Euler and externally, playing a crucial role in market creation, risk curation, return optimization, and liquidity management.

Security​

It's important to note that while risk curators can rebalance user fund allocations to optimize returns, they do not have the authority to withdraw user funds, ensuring that depositors maintain control over their assets.