Managing Liquidity Risk

Managing Liquidity Risk

To manage liquidity risk, DeFi stakeholders (protocols and investors) employ various strategies, such as maintaining sufficient liquidity reserves, utilizing stablecoins to reduce volatility, implementing efficient price discovery mechanisms, and conducting regular audits to ensure smart contract security. Additionally, diversification of assets and liquidity sources can help mitigate the impact of liquidity risk.

EEA Liquidity Risk Mitigation Guidelines

Adequate Capital Reserves

Protocols SHOULD demonstrate Adequate Capital Reserves.

Unleveraged liquidity reserves

Protocols SHOULD hold reserves for liquidity that are not leveraged.

Results of Stress Tests

Protocol Reports SHOULD detail the results of stress tests and analyses related to liquidity shocks and adverse market conditions, including any identified vulnerabilities and proposed mitigations.

Hedging

Users, protocols and investors SHOULD hold a range of tokens or other hedges against a liquidity problem in a given Protocol.