Asset Risk

The task of assessing new currency tokens, collateral tokens and Murabaha tokens follows a level of due diligence that is shared between the different teams. The assessment methodology considers the following factors for each asset:

Smart Contract Assurance: Audits for each asset are reviewed internally. The longevity of a smart contract's code can be deduced by analysing the duration and the count of transactions it has been involved in. Parameters like permissions, user adoption, developmental activity, and, in some cases, dependability are indicators of how thoroughly the code has been tested.

Counter-Party Exposure: This looks at the qualitative aspects of how and by whom an asset is managed. Various degrees of governance decentralisation might offer direct influence over funds (for example, as collateral) or introduce vulnerabilities into the governance framework. This can potentially endanger control and financial resources. The concentration or distribution of governance is gauged by the number of entities influencing a token's protocol and the trust placed in the organization, community, or procedures.

Market-Related Vulnerabilities: These are influenced by the daily average volume of a specific asset in a protocol and the variations in its supply and demand. It's crucial for markets to maintain adequate volumes to compensate for potential liquidations of certain collateral (that is, sales which can reduce the asset's price, impacting recovery values through slippage). Assessing market risks should incorporate average daily volume data to evaluate liquidation risk. More importantly we asses the historical on-chain liquidity to evaluate adequacy of liquidations.

The assets volatility profile focuses on the standardised price oscillations of a token and is derived from the standard deviation of the logarithmic returns σ[ln( close(t) close(t+1) ​ )].

These figures need to be reviewed at regular intervals of 1 week, 1 month, 3 months, 6 months, and 1 year. Tokens might experience abrupt price surges; seeing a 50% price shift in a week or month isn't rare. Should there be a price surge, risk parameters might be adjusted to curtail new operational hazards. Additionally, market capitalisation gives insight into market size and prospective risks.

The Market vulnerabilities play a role in adjusting protocol's risk parameters. Volatility determines the necessary Debt to Collateral ratio, while liquidity risks are managed by introducing incentives for liquidation, such as Liquidation Thresholds and penalties.

Shariah Vulnerabilities : Involves assessing the structure, purpose and utility of an asset in order to determine if it is in line with islamic principles. An asset may have been deemed compliant at the time it was added but changes in its structure, purpose and utility may prompt a revision.

Assets will be given a score from 1 to 10. 1 being poor and 10 being good. Only assets that meet certain thresholds will be considered as collateral, currency or Murabaha tokens. Below is a rating score example:

Although Murabaha tokens don't present a risk of insolvency to the protocol, they can pose some risk to Murabaha takers as well as adding additional smart contract complexity, additional iterative costs and governance considerations for the AZKA protocol.

There is a trade off when considering currency and collateral tokens. Most tokens with good 'Market Vulnerability Rating', 'Shariah Vulnerability Rating' and historically resilient smart contract code pose some level of centralisation risk. It is important that users are aware of these trade-offs and risks.