Methodology

Investment decisions are based on our research work. We research stablecoins to assess their safety. We also analyze the economic aspects of protocols to gauge the risks. Selected pools are included in the two categories of the weekly:

1. Benchmark: Investments where the TVL is ideally more than $3m, with safe stablecoins as underlyings and the protocols are battle-test to be economically stable.

2. Exotic: Investments where the TVL is ideally more than $1m, with reasonably designed stablecoins as underlyings and the protocols are designed to be economically stable.

Project Blizzard uses strategies from the Exotic category of our weekly report, or strategies similar to those (not included as they might be smaller or repetitive).

In other product designs, we typically apply a yield discount to assess risk. For example, a pool on Ethereum is considered safer than one on Arbitrum, Arbitrum is safer than Blast, and Blast is safer than the yet-to-launch BeraChain. The higher the perceived risk of a blockchain, the higher the yield discount applied. The same logic applies to stablecoins: Tier 1 is safer than Tier 2, and Tier 2 is safer than Tier 3. This principle also holds for Project Blizzard.

Risk Prioritization for Blizzard

One key question in Blizzard is: If high-leverage lending and funding rate arbitrage offer similar returns, which one should we choose? For example, if borrowing USDC to buy pt-sUSDe provides the same return as a long-short ETH strategy on Binance/Hyperliquid, which option is better? To determine the optimal investment, we use an exclusion method. We first rank risk factors from most concerning (high probability of failure) to least concerning (safest), then eliminate options accordingly.

Preliminary Risk Ranking (from most to least concerning):

1. Projects with obvious issues

2. Unknown or newly launched DeFi protocols

3. New blockchains

4. Newly issued stablecoins (further assessed to determine if they belong in categories 1, 2, or 3)

5. Tier 3 stablecoins

6. Investments with liquidation risks (high leverage allowed, high LTV, low-liquidity collateral)

7. Risky oracle designs (e.g., custom oracles, especially for yield-bearing instruments)

8. Investments requiring third-party execution (e.g., vault-based projects like HJLP)

9. Projects where reward tokens have a vesting period

This list will be continuously updated and refined as we calibrate risk preferences throughout the investment process.

Investment Decision Rule

When the return exceeds 30%, we prioritize the lowest-risk options within the acceptable threshold.

Appendix

An example of our weekly (12 Oct 2024 article) is attached below.