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Chulalongkorn University's Kanis Saengchote develops G-SIP, a unique framework to identify and measure systemic risk in decentralized finance, inspired by traditional banking protocols.
Thailand's Chulalongkorn University is now the birthplace of a revolutionary framework designed to detect and gauge systemic risks within the intricate universe of decentralized finance (DeFi). The brainchild of researcher Kanis Saengchote, this protocol is named the Global Systematically Important Protocol (G-SIP), inspired by similar mechanisms utilized within the existing banking sector.
Drawing lessons from the global banking crisis of 2008, the world of traditional finance has engineered protocols that identified critical banking structures to hinder future breakdowns. They conceived a method to pinpoint and evaluate "global systemically important banks" (G-SIBs), which permitted the Bank for International Settlements to discern frailties and institute standards, fortifying safeguards against losing money.
The echoes of these measures are seen in Saengchote's innovative work. His research paper meticulously outlines how comparable standards could be applied to what he dubs "blockchain banks," or any DeFi protocol functioning within a blockchain.
A part of the research paper elucidates the dire necessity for identifying systemic risk, and forging strategies to cope with emergencies, highlighting the volatile nature of financial interactions and the rapid deleveraging that occurs due to the algorithmic basis of DeFi. Recent incidents like the Terra collapse underlined this situation, leading to what Saengchote labels a "death spiral" due to the ensuing fire sale.
Saengchote's G-SIP delves into the relationships between various DeFi protocols, discerning which network nodes wield excessive influence. While establishing the parameters, the researcher analyzed four major protocols on the Ethereum blockchain (Aave, Compound, Liquity, and MakerDAO), representing 88% of the “blockchain banks”.
The findings project MakerDAO's higher risk profile, necessitating increased capital to efficiently neutralize associated risks. Thus, Saengchote's G-SIP heralds a new era in risk assessment, setting the foundation for a more secure decentralized financial landscape.
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