Welcome to the first edition of ‘The Cortex Connection’, CortexDAO’s periodic newsletter that is dedicated to providing our readers with the latest news, tips, and tricks as it relates to the world of DeFi and related technologies. As the ecosystem continues to evolve, it’s important to stay up-to-date on the latest developments and trends but it may not always be easy to keep up.
‘The Cortex Connection’ aims to consolidate and cover a wide range of information from in-depth analysis of the latest DeFi projects, step-by-step guides and how-to’s, or simply the latest updates and conversations we’re able to pull from social media and various news sources. We hope you enjoy our journey as we explore the space together.
Liquidity Risk Management
As DeFi continues to grow, one key area of concern for users is liquidity risk. DeFi platforms rely on liquidity to function properly, but liquidity can also be a source of risk if it is not managed carefully. This newsletter will explore the importance of liquidity risk management and some strategies for mitigating this risk.
First, what is liquidity risk? Liquidity risk refers to the risk that affects whether a user may or may not be able to sell their assets quickly enough or at a fair price, resulting in losses. In DeFi, liquidity risk can arise in a number of ways, such as through low trading volumes, market manipulation, smart contract vulnerabilities, or specific failure events like a destabilized (or ‘depegged’) stablecoin asset.
To manage liquidity risk, it's important to take a multi-faceted approach. Here are some strategies to consider:
Diversification: Spread your investments across different protocols and assets to minimize the impact of any one liquidity event. Adequate diversification will reduce your exposure to loss, and avoid total loss, in the case of failure. As an example, in May 2022 the Luna stablecoin ‘UST’ depegged from the US Dollar causing billions of dollars in losses. If users had equally spread their exposure to even 2 other stablecoins, like USDC and USDT, they would have only been down ⅓ of their portfolio v a total loss.
Monitoring: Keep a close eye on the liquidity of the assets you are trading or investing in. Use tools like liquidity heatmaps or order book analysis to stay informed about market conditions. Some of our favorites include:
Cryptowatch which provides real-time market data and order book analysis.
Tradingview to monitor and analyze past and present fluctuations in asset prices.
Whale Alert is a Twitter account that provides real-time alerts for large cryptocurrency transactions that can be used to identify market-moving trades and monitor liquidity.
TokenInsight is a platform that provides data analysis, ratings, and order book analysis.
We’ll cover some more advanced methods such as reviewing liquidity pairs directly on decentralized exchanges like Curve Finance in future releases.
Due Diligence: Before investing in a new DeFi project or protocol, do your research to assess the quality of its liquidity provisions and risk management practices. Join the official Discord, Telegram, or other live chat for the projects in question. Follow their socials (Twitter, Substack, Medium). Keep in touch with the project team as best as you can.
Contingency Planning: Have a plan in place for how to respond to a liquidity event, such as a sudden market crash or a flash loan attack. This could involve setting up stop-loss orders or having backup liquidity sources ready. Contingency planning would have allowed a quick portfolio pivot out of UST when the depeg and eventual total loss of that asset occurred, as well as a temporary shift out of USDC during the liquidity scare that came as a result of their reserve risk exposure to the failed Silicon Valley Bank.
Education: It’s important to stay informed about risks and be aware of the latest news events that could affect projects you are involved in. Staying one step ahead of others and being prepared gives you an edge in your risk management strategy. While there are many resources to pick from, including our newsletter, other common resources include:
Messari is an industry favorite and is widely accepted as the go-to data and research provider for the industry including deep dive analysis and research reports on DeFi protocols and provides real-time market data and news updates.
DeFi Pulse provides real-time data on DeFi protocols and projects and offers comprehensive overviews of the DeFi ecosystem including market data, token prices, and protocol analysis
Coindesk is one of the leading news agencies that cover the crypto and blockchain industry, including DeFi.
Cointelegraph is also provides coverage of DeFi news, analysis, and educational content on the latest developments in the space.
By following these basic strategies, users can better manage their exposure to liquidity risk and avoid costly losses. As DeFi continues to evolve, liquidity risk management will remain a crucial area of focus for anyone participating in these markets.
What’s Going On in the News?
Looking to farm some potential upcoming airdrops? @Crypthoem gives a step-by-step guide on how to research and participate.
PlanB shares another model covering 4 market stages with some insights on what stage he believes BTC is in now. Worth digging into the comments section.
A little old but worth sharing as ZkSync news is making the rounds, Polygon zkEVM Mainnet Beta goes live with support from Vitalik Buterin himself.
Feedback!
We hope you found this first edition of ‘The Cortex Connection’ informative and helpful. As we strive to make this newsletter the best resource for our readers, we would love to hear from you. We welcome any feedback or suggestions for improvement. If there are any topics related to DeFi that you would like us to cover in future issues, please feel free to visit our Discord channel to let us know! Your feedback and input will make sure that we’re providing content that you want to see.
Thank you for reading!