# Methodology
Beta uses an **isolated collateral model** for tighter fund security. This means that if an asset is compromised, the entire protocol remains safe. The isolated model gives Beta users confidence that their assets are safe even if Beta has a market with a compromised asset. Verified markets configured by governance are evaluated by smart-contract risk, counterparty risk, and market risk. These risks inform the risk parameters that are set for these assets.
## Risk Factors
### **Smart Contract Risk**
**Smart-contract (SC)** risk estimates the likelihood of issues emerging with the technical implementation of an asset. SC risk of an asset is assessed by:
* The number of transactions
* The number of holders
* The quality of the audits conducted.
* The presence of bug bounties
* The TVL of the asset if it takes user deposits
* The age of an asset
| **Tier** | **Txs** | **Users** | **Age of Asset** | **Audits/Bounties** | **TVL** |
| -------- | -------------- | ------------ | ---------------- | ----------------------------------------------------- | ---------- |
| **S** | **1,000,000+** | **100,000+** | **2 years +** | **Several high quality Audits & $1mm+ bounty** | **$500m+** |
| **AA** | **500,000+** | **50,000+** | **1 years +** | **High quality Audit & second audit & $500k+ bounty** | **$100m+** |
| **A** | **250,000+** | **25,000+** | **6 months +** | **High quality audit & $100k+ bounty** | **$50m+** |
| **BB** | **100,000+** | **10,000+** | **3 months +** | **High quality audit & $50k+** | **$10m+** |
| **B** | **50,000+** | **5,000+** | **2 months +** | **Several audits & $10k+** | **$1m+** |
| **C** | **< 50,000** | **< 2,500** | **< 2 months** | **An audit & some unit/integration tests** | **< $1m** |
### **Counterparty Risk**
**Counterparty (CP)** risk is an approximate measure of the centralization of an asset. CP risk of an asset is assessed by:
* Qualitative assessment of the centralization of an asset and its developers
* The governance structure of an asset
* The exposure of the asset to regulatory risks
* The asset reliance on a custodian
* The distribution of governance power and implementation of treasury/contract management. E.g. n of k multi-sig vs. single signer
* How mutable are the market characteristics of an asset due to governance
| **Tier** | **Team risk** | **Centralization risk** | **Regulatory risk** |
| -------- | ----------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | --------------------------------------------------------------------------- |
| **S** | **Extremely reputable team with clear incentives to act in protocol best interest** | **Contracts controlled by DAO or 1st world government-regulated custodian** | **Extremely unlikely to have regulatory action enacted against asset/team** |
| **AA** | **Highly reputable team** | **DAO governance or highly reputable custodian** | **Highly unlikely to have regulatory action enacted** |
| **A** | **Very reputable team** | **DAO governance or protocol multi-sig w/ off-chain voting or great custodian** | **Very unlikely to have regulatory action enacted** |
| **BB** | **Very reputable team** | **Multi-sig governance with off-chain voting** | **Unlikely to have regulatory action enacted** |
| **B** | **Reputable team** | **Multi-sig governance without voting** | **Regulatory risk is present** |
| **C** | **The team can be vouched for** | **Single-signer governance** | **Regulatory risks present or pending** |
### **Market Risk**
**Market (M)** risk is a quantitative assessment of the present liquidity and historical volatility of an asset. M risk of an asset is assessed by:
* The average 24-hour volume is a proxy for available liquidity across CEX\&DEX
* The paired liquidity can inform the present liquidity of an asset on DEXes and the availability of an asset on reputable CEXs
* AMM liquidity growth and decay
* Historical price movement risk (a proxy for historical worst-case volatility) can be measured as the maximum price movement within an hour and four hours. An hourly sampling rate reflects an upper bound on time between oracle updates for a Beta market, where price volatility is relevant
* The oracle deviation threshold for which price is updated. Smaller implies the protocol has more accurate knowledge of an asset’s price
| **Tier** | **Avg. 24-hr volume** | **DEX AMM Liquidity** | **1-hour max % change** | **4-hour max % change** | **Oracle Dev. Threshold** | **CEX Listings** |
| -------- | --------------------- | --------------------- | ----------------------- | ----------------------- | ------------------------- | ------------------------------------- |
| **S** | **$1b+** | **$100m+** | **2.5%** | **5%** | **1%** | **Exchanges with $1b daily volume** |
| **AA** | **$100m+** | **$25m+** | **5%** | **10%** | **2%** | **Exchanges with $1b daily volume** |
| **A** | **$50m+** | **$10m+** | **10%** | **20%** | **3.5%** | **Exchanges with $100m daily volume** |
| **BB** | **$10m+** | **$5m+** | **20%** | **40%** | **\*\*\*** | **Exchanges with $100m daily volume** |
| **B** | **$1m+** | **$1m+** | **40%** | **60%** | **\*\*\*** | **Exchanges with $10m daily volume** |
| **C** | **< $1m** | **< $1m** | **> 40%** | **> 60%** | **\*\*\*** | **\*\*\*** |
The quantitative framework described serves as guidance to evaluating the riskiness of an asset. Based on these three risk factors and additional team evaluation, governance determines which of the six asset tiers (S, AA, A, BB, B, C) a money market is assigned and which LTV and Collateral Factors are appropriate. The risk tiers of money markets are able to be upgraded or downgraded.
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