How Alterscope Enhances Risk-Adjusted Rebalancing of Spool Smart Vaults
Benedikt Eikmanns, Andre Costa
January 25, 2024
7 min read
TL;DR: Spool Smart Vaults are a sophisticated tool for managing and optimizing investments in DeFi. Alterscope is the first vetted risk model provider for Spool Finance, bringing sophisticated real-time risk capabilities to the Spool ecosystem.
Risk Management Powered by Alterscope
Alterscope uses a comprehensive methodology based on machine learning and real-time risk processing to amplify how users can designate their investment strategies. Users can select a risk model when building a personalized Smart Vault — which then allocates funds and dictates investment activity within their portfolio based on an extensive set of vetted risk parameters. Alterscope’s risk model provides a multi-level risk score for each protocol, creating a transparent risk framework using the following parameters and dimensions.
Assets of Smart Vaults are periodically rebalanced to reflect the Smart Vault’s risk assessment. This reallocation adjusts capital allocation to maximize capital efficiency within the constraints of the parameters and risk appetite set by each Spool Smart Vault. The reallocation process involves checking that all smart vaults have the same asset group, confirming all strategies involved, and calculating new allocation and how much to withdraw and deposit for each smart vault strategy.
The risk model, provided by Alterscope, fits into this process by determining the risk appetite, which guides the reallocation of shares among different strategies. If the risk model indicates a higher risk appetite, the vault may allocate more shares to higher-risk, higher-reward strategies. Conversely, if the risk model indicates a lower risk appetite, the vault may allocate more shares to lower-risk, lower-reward strategies.
About Spool Smart Vaults
Spool Smart Vaults are a type of smart contract that routes deposits into various yield-generating protocols in a risk-managed and yield-optimized manner. The purpose of Spool Smart Vaults is to simplify the process of creating and managing yield generation DeFi products. It allows users to maintain their desired level of risk exposure despite ever-changing market conditions, while also minimizing their gas costs, labor, and exposure to potential black swan events by rebalancing capital at a larger scale.
Automated vault rebalancing in the Spool Protocol involves smart contracts, risk models, and a dynamic allocation mechanism. This system allows users to manage their DeFi investments with a focus on risk-adjusted returns, leveraging automation to optimize capital allocation based on the risk preferences set by the user. Rebalancing within the Spool Protocol involves several technical components that work together to optimize and manage risk in DeFi investments.
The Spool Protocol involves several smart contracts that interact with each other. These include contracts for managing assets, deposits, withdrawals, and rewards. Spool Smart Vaults are central to the protocol. They are smart contracts that users set up individually in a permissionless manner. Each Smart Vault contains settings for strategies, a risk model, a risk appetite, and potential rewards (APY). These vaults manage and compound capital by dynamically allocating it among different yield-generating strategies based on the risk parameters set by the user. Each Smart Vault has its deployment of SmartVault.sol, which implements tokens representing the user's share in the vault.The protocol utilizes risk models to assess and assign risk scores to various strategies. Users can select their preferred strategies, risk model, and set their risk appetite. This enables the Smart Vault to reallocate capital among the selected strategies to optimize for risk-adjusted yield - Alterscope as a risk model provider.
Up to 16 yield-generating protocols can be included in one Smart Vault and once the respective yield-generating protocols have been selected, users can set a performance fee to a maximum of 20 percent, generating additional profit from other investors choosing to deposit in the Smart Vault. A key feature of Spool Smart Vaults is that they do not hold user funds directly in the contract. This makes them a prime partner for professional custodians as well as institutions getting into DeFi for the first time. The Spool Protocol supports asynchronous "DoHardWork" calls, ensuring full composability and preventing gridlock when one strategy becomes unavailable.
In addition to their core functionality, Spool Smart Vaults offer a range of advanced features. For example, they can be white-labeled, allowing institutions to leverage their brand recognition and client trust, and support multi-chain deposits and cross-chain collateralization. The V2 upgrade of the Spool Protocol introduced multi-asset Smart Vaults, which allow institutions to build diversified investment strategies using multiple assets. This upgrade also introduced Smart Vault Guards, which allow institutions to dictate who can deposit or withdraw from the vaults, ensuring adherence to regulatory standards like KYC and AML.
How Alterscope Contributes to Spool’s Success
Spool is designed as an overarching portfolio management tool. The typical setup of a Spool Smart Vault comprehends users who select from a range of stablecoins (e.g., USDC, DAI, USDT) to start creating a Smart Vault. A key component of the protocol, many Smart Vaults dynamically reallocate capital between various protocols based on the provision of risk models that take into account real-time events in the ecosystem.
Spool users can define their risk appetite on a scale from 0 (Risk Averse) to 10 (Risk Seeking), and choose a risk model. Risk appetite refers to the level of risk an organization or investor is willing to accept in pursuit of their objectives. In the context of Spool Finance, risk appetite is set by the users when they create a Spool Smart Vault, which is a "vault" consisting of creator-defined settings for strategies, a risk model, a risk appetite setting, and potential rewards (APY). Users can choose their desired level of risk exposure, which helps Spool dynamically reallocate capital between various strategies or protocols based on the risk scores calculated by their individually set risk appetite and risk models. Risk models, on the other hand, are quantitative models used to assess and assign risk scores associated with a strategy or protocol. These models are used to translate the risk of a given strategy and protocol to a risk score via input variables as provided by Alterscope.
To sum up: In the context of Spool's Smart Vault, a risk model is a key component that guides the vault's rebalancing process. As the first vetted Risk Model Provider, Alterscope provides risk models that influence the vault's strategy allocation process based on a user’s risk appetite.
Outlook: Community-Driven Risk Scoring Enabled by Alterscope
Advanced risk management and strategic investment optimization are crucial for the growth and stability of the DeFi ecosystem. Alterscope will allow the community to build their own customizable risk frameworks leveraging over 400 different parameters, addressing risks grounded in the composability and interconnectedness of web3. The strength of Alterscope’s solution lies in its real-time capabilities, the opportunity for community collaboration, and the ability to integrate diverse parameters from chains, protocols, and various middleware solutions simultaneously. These community-based risk frameworks can be leveraged in the future by Spool Smart Vaults. Additionally in the future, Alterscope is progressing towards incorporating zk-proofs into its risk frameworks, enhancing user privacy and augmenting ecosystem protocols with greater intelligence and flexibility. Spool Finance and Alterscope will be at the forefront of this transformation.
Alterscope provides the infrastructure for Decentralized Finance to enable the real-time processing of fundamental risks across chains, protocols, and liquidity pools. By aggregating multi-chain risk parameters, Alterscope creates transparency, sets the stage for machine learning, and allows the implementation of risk-adjusted returns for digital asset investment managers. As a decentralized organization, Alterscope will enable novel risk primitives and become the overarching risk layer for DAOs and dApps.