A Thai scientist developed a new Global Systemically Important Protocol (G-SIP) tool to identify and measure systemic risk in the DeFi sector. This protocol is based on a similar system used in the traditional banking industry and can potentially predict and prevent a market collapse.
Kanis Saengchote, Researcher at Chulalongkorn University in Thailand, developed the Global Systemically Important Protocol (G-SIP), a tool that identifies and measures systemic risk for DeFi protocols.
G-SIP is based on the G-SIB protocol developed by the Bank for International Settlements (BIS) after the 2008 global banking crisis. The core mechanism of the new protocol identifies interactions between DeFi protocols, just as G-SIB identifies critical banking structures. Similar to the BIS protocol, the new tool can highlight the most influential nodes, identify risks, and set the necessary capital requirements to mitigate them.
The tool’s creator notes that due to the algorithmic nature of DeFi, the deleveraging process can happen relatively quickly and cause instability, which in turn can lead to protocol collapse. One clear evidence of this is the destabilization of Terra. The G-SIP protocol can predict and prevent the crypto market collapse by identifying DeFi protocol problems in a timely manner and signaling a lack of liquidity.
As part of his research, Saengchote tested the created tool by evaluating the risk profiles of four DeFi protocols that generate about 88% of activity on the Ethereum blockchain. The scientist evaluated the performance of Aave, Compound, Liquity, and MakerDAO between June 2020 and June 2023 using four criteria:
- the amount of outstanding loans issued for all the crypto-assets;
- crypto-assets in custody (deposited or blocked as collateral);
- the share of liquid staked derivatives (LSD);
- loans granted to users who borrow assets in at least two protocols at the same time.
According to the analyst’s findings, the MakerDAO protocol has the highest risk profile. Because of its complexity and interconnectivity with other protocols, MakerDAO problems could severely impact the entire DeFi sector, and solving these problems would require high capital investment. The second protocol with a high risk profile was Aave, and Liquity was identified by the system as the protocol with the lowest risk profile of all the protocols analyzed.
Curve Finance was hacked the other day, which led to financial losses of several DeFi protocols.
