Risk Curators
Risk curators play a vital role in the Euler ecosystem, acting as guardians of protocol safety and efficiency. Their responsibilities vary depending on the type of vault they govern, but their core mission remains the same: to ensure the security and sustainability of the protocol while maximizing returns for depositors.
Credit Vault Risk Management
In credit vaults, risk curators face the critical task of managing risk parameters to protect depositors while enabling efficient borrowing. Their primary goal is to ensure that borrowers remain over-collateralized at all times, maintaining the incentive to repay their loans in full.
Collateral Selection
The foundation of risk management begins with careful collateral selection. Risk curators must choose assets that are both liquid enough to be easily liquidated in times of distress and sufficiently correlated in price with the borrowed asset. This correlation helps prevent situations where volatile market conditions could push borrowers into under-collateralization. Poor collateral selection can expose depositors to bad debt risks, particularly if the underlying assets become difficult to price or liquidate.
Loan-to-Value Management
Once collateral assets are selected, curators must establish appropriate loan-to-value (LTV) ratios. These ratios come in two forms: the maximum LTV, which caps how much users can borrow, and the liquidation LTV, which determines when a position becomes eligible for liquidation. The liquidation LTV is typically set higher than the maximum LTV, providing a buffer against immediate liquidations even if prices move against borrowers who have taken out maximum loans.
Risk curators can adjust these LTV ratios over time through a process called LTV ramping. This mechanism allows for gradual changes to liquidation LTVs over a set duration, preventing sudden adjustments that could force immediate liquidations. The speed of these adjustments is at the curator's discretion, allowing for responsive risk management while protecting borrowers from unfair losses.
Pricing and Oracle Selection
Accurate pricing is crucial for maintaining protocol safety. Risk curators must select appropriate pricing mechanisms and oracles to value both collateral and debt assets. While USD is the most common unit of account, curators can choose other units like ETH if more appropriate for the assets involved.
Euler's oracle-agnostic approach gives curators flexibility in choosing their pricing providers. They can select from various options including Chainlink, Pyth, Redstone, Chronicle, and API3, and can implement either push or pull-based systems based on their specific needs.
Supply and Borrow Caps
To manage risk exposure effectively, curators can implement supply and borrow caps. These caps limit how much of an asset can be deposited or borrowed, providing an additional layer of risk control. While these caps can be temporarily exceeded within a transaction batch, the system only allows transactions that reduce violations if the caps are exceeded at the start of a batch.
Advanced Controls
Risk curators have access to various hooks that enable additional custom rules and restrictions. These include pause guardians for crisis management, permissioned vaults for restricted access, flash loan fees, and utilization caps to prevent excessive borrowing from depleting liquidity.
Earn Vault Risk Management
In Earn vaults, risk curators take on a different role, focusing on optimizing returns while managing risk across various yield strategies. They act as intermediaries between passive lenders and yield-bearing products, both within Euler and externally.
Strategy Management
Risk curators have the authority to enable or disable specific yield-bearing vaults, directly influencing which yield opportunities are available to users. They must continuously monitor and assess the risk profiles of their vaults, making strategic adjustments to market allocations to optimize risk-adjusted yields.
Liquidity Management
A crucial aspect of Earn vault management is handling the flow of funds. Curators determine the order in which markets receive supply and handle withdrawals, directly affecting returns and liquidity for suppliers. This requires careful balancing of immediate returns against long-term stability.
User Protection
To enhance security and trust, risk curators can implement timelocks on critical operations. These timelocks provide users with a window to react to potential changes in market parameters or roles, ensuring transparency and giving users time to make informed decisions about their positions.
Security Considerations
While risk curators have significant control over risk parameters and strategy management, it's important to note that they cannot withdraw user funds. This non-custodial nature of the vaults ensures that depositors maintain control over their assets. However, the effectiveness of risk management ultimately depends on the curator's decisions regarding collateral selection, LTV ratios, and oracle choices. Poor choices in these areas could potentially expose depositors to greater risk of bad debt.
Users therefore place a degree of trust in risk curators to manage risks on their behalf through their control over risk parameters. This trust is earned through transparent decision-making, effective risk management, and consistent performance in protecting depositor interests while maximizing returns.