This document outlines the Bonq DAO Whitelisting methodology, its main categories, and factors that impact the process. Bonq DAO relies on these underlying factors to assess a web3 project /protocol’s creditworthiness and decides if a token can get whitelisted as a collateral for the Bonq liquidity platform.
The token must be actively trading and have a live on-chain USD or EUR price feed
Minimum of 6 months of trading history
Listed on at least 3 exchanges/market/pools on Coingecko or CoinMarketCap
Minimum daily volume > $500,000
Fully Diluted MarketCap > $50 million
Volatility (variance) of 30-day price range < 50%
3rd Party auditing
The token has to trade on the chain where BEUR is deployed
No block restrictions on transferring or trading the tokens
Token holders are the only ones who can transfer or burn their tokens
There are three different risk categories which are critical in assessing whether a token would be allowed as a collateral on the Bonq lending protocol:
Each individual risk category has a score that ranges from 0 to 100 and is calculated as a total sum of each evaluated sub-group. The risk category assessments are carried out by the Bonq DAO contributors using community templates and feedback and voted by the Bonq DAO members.
Each risk category must score a minimum of 50 to be considered by the Bonq DAO.
While the Fundamental and Technical Risk Scores are only used for whitelisting new tokens, the Market Risk Score has additional functions in deciding the Minimum Collateral/ Liquidation Ratios and Borrowing Capacity for each token.
Fundamental Risk Score enables a comprehensive evaluation of the overall quality of the protocol and uncovers potential design risks. It looks at the value offering, usefulness, strengths/ weaknesses, and competitive advantage.
Technical Risk Score indicates how closely projects follow best practice in terms of process quality and cybersecurity. Evaluates the smart contracts, checks to see if they match the software repository used to develop the code, looks at the documentation and stress tests and verifies the audit reports.
Market Risk Score quantifies the exogenous risks that occur when crypto markets are volatile and cause the collateral assets to fluctuate a lot. Tokens that have lower than average historical volatility and higher trading liquidity on exchanges should have lower risk of triggering cascading liquidations when markets go through correction cycles.
Estimating the average daily trading volume of crypto assets is difficult due to wash trading and other market manipulation practices. For this reason, Bonq uses the aggregated daily volume from CoinGeko or CoinMarketCap and applies a multiple to adjust for the overstated trading numbers.
Volatility measures the degree of variation of asset price changes over a given time interval. Given that asset volatility changes over time and is affected by market microstructure, it is one of the most important factors in defining Bonq’s market risk exposure. Volatility should be assessed at the following intervals using exponential moving averages over 1 week, 1 month and 3 months.
Market Risk Score Template (daily updates)
Sudden changes in the Market Risk Score trigger changes in risk parameters for individual tokens such as Minimum Collateral Ratio (MCR) and Borrowing Capacity.
MCR setting per individual token
Bonq uses a bounded decay exponential function to define the change in MCR in relation to a change in the underlying Market Risk Score. Practically, the curve anchors the top scores (between 90 and 100) to 125 MCR and the lowest scores (50-60) to 500 MCR while allowing a more severe decline of the score, as certain ratios move to higher risk values.
When the market risk score changes, the newly opened troves will reflect the new MCR while the existing troves will not see their MCR updated until new debt is minted. However, any trove with an MCR at or below the latest MCR for the collateral, will provide redemption at 0.5%, which is the minimum fee. Having a trove with the minimum redemption fee, increases the risk of losing collateral to the arbitrageurs if the BEUR peg drops by 0.5%.
This curve function will have a different distribution for stable coins with an upper bound of 110% and a lower one of 130%.
Borrow Capacity per individual token
Borrow Capacity is a metric targeting a maximum amount of borrow that is feasible considering the protocol’s risk profile. Evaluating all factors that influence the Bonq’s Market Risk as well as the overall token supply, Bonq calculates a real-time Borrow Capacity that defines a target protocol leverage, and subsequently calculates a Euro Borrow Capacity.
Increased leverage increases risk, and therefore borrow capacity should increase or decrease based on the overall token’s Market Risk Score
If the current borrowing capacity for a specific token hits the maximum leverage approved by the Bonq protocol, loan issuance is stopped for that particular token. Users can still open loans using different collateral assets.
Bonq DAO aims to continue building robust DeFi risk models that simulate real-world crypto behavior within a certain risk tolerance. This is just the first step in creating a self-sovereign economy that incentives good underwriting practices while opening up the crypto debt markets to a wide variety of protocols.
If you are a Web3 or DeFi project that wants to have your native token listed on the Bonq lending protocol, please contact me at firstname.lastname@example.org.