Indicators
- Loop Flow Imbalance (LFI): This measures the absolute net loop flow over a rolling window, divided by the rolling volume. A high LFI can indicate one-sided market pressure. As a starting guardrail, an LFI greater than 0.20 is treated as a caution signal.
- Utilization Volatility: This is the standard deviation of utilization over a rolling window. High volatility can signal instability in a lending market. The 80th percentile of the past year’s utilization volatility is used as a caution threshold.
- Liquidity Concentration (LC): This is the ratio of looped assets to total vault assets. A high concentration increases the risk of a single strategy or asset. An LC greater than 0.40 is treated as a caution signal.
- Price-Impact Proxy: This is the average realized slippage per unit notional in recent rebalances. A policy limit is set based on the last 3-6 months of executions (e.g., not exceeding the 90th percentile of observed slippage per unit size).
Responses
When multiple indicators persistently breach their thresholds, the system enters a “caution mode” with the following responses:- Tighten Tolerances & Raise Reserves: Rebalance triggers are tightened, and the vault reserve is increased to provide a larger buffer for user redemptions and strategy unwinds.
- Cap New Loop Notionals: The system may cap the notional size of new loops or pause new loop initiations altogether to reduce risk.
- Prefer Smaller, Batched Corrections: The system will favor smaller, more frequent corrective moves to avoid large, market-moving rebalances.
Caution mode triggers when multiple indicators breach thresholds persistently.