Chaos Labs Risk Management Proposal
Summary
Chaos Labs proposes to enter into a risk management partnership with the Renzo community. This proposal includes:
- Developing bespoke risk methodologies designed around Renzo’s unique strategic positioning unlocking safe, sustainable growth for the protocol.
- Building a comprehensive risk management portal, empowering Chaos Labs and the broader community to identify and diagnose risks in advance.
- Creating a Renzo specific AVS risk framework, designed to address slashing, solvency and liquidity risks that arise from validating additional modules, specifically in relation to the incremental yield provided.
- Ongoing Risk Assessments covering all risk-relevant aspects of the Renzo protocol and its LRT tokens.
- The integration of Chaos Labs’ recently launched Risk Oracles.
Introduction
Chaos Labs is a market leader in risk management and optimization solutions explicitly designed for DeFi protocols. Our strategies are framed to safeguard protocol assets against manifold threats such as market volatility, black swan events, liquidity raids, and diverse instances of market manipulation. We meticulously craft strategies to ensure the resilient preservation of protocol assets, even under turbulent market conditions. Our methodology is predicated on a comprehensive approach aimed at fortifying protocols against systemic risks, accomplished through dynamic and contextually responsive risk parameter recommendations. We emphasize the constant monitoring of positions and liquidity to optimize the performance of our protocols amidst market fluctuations.
Chaos Labs proposes a strategic collaboration with Renzo to create the frameworks necessary to scale and grow the Renzo restaking network in a secure, scalable, and robust manner. Chaos Labs will treat Renzo as a flagship customer, dedicating ample resources to this engagement. As a significant restaking protocol, Renzo and Chaos Labs have the opportunity to collaborate and firmly establish themselves as market leaders in Retaking Financial Risk, Economic Security, and Optimization.
This proposal includes all services for Eigenlayer, Symbiotic, Karak, and restaking protocols that will follow similar patterns to those. Wherever “Eigenlayer” and “AVS” are used throughout this proposal it is meant to include the above protocols and their respective secured services.
Value Proposition
By partnering with Chaos Labs, Renzo will gain access to cutting-edge research and technology that will enhance the security and scalability of its restaking network. Chaos Labs will provide expertise and resources to help Renzo achieve its goals, positioning both organizations as leaders in the industry.
What the Renzo Community Will Receive
- AVS Selection and Allocation Parameter Platform: A data-driven platform providing recommendations on AVS selection and optimal allocation parameters, enhancing efficiency and security.
- Staked Token Recommendations and Reward Token Management - We will develop a risk framework and provide ongoing recommendations for including tokens in staking and managing AVS reward tokens.
- Risk and Observability Analytics Platform: This comprehensive platform offers deep insights into the operational and financial risks associated with restaking. It will help Renzo monitor and manage risk effectively.
- Risk Oracle Integrations: Integration with risk oracles to ensure real-time, reliable risk assessment and mitigation.
Why This is Good for the Renzo Community
- Enhanced Security: Implementing research-driven methodologies will bolster the security framework of Renzo’s restaking network.
- Scalability: The collaboration will create scalable solutions, enabling Renzo to grow without compromising performance or security.
- Market Leadership: By leveraging Chaos Labs’ expertise and resources, Renzo will strengthen its position as a market leader in economic security and optimization.
- Resource Allocation: Chaos Labs will treat Renzo as a flagship customer, ensuring that significant resources and attention are dedicated to this partnership.
About Chaos Labs
The Chaos Labs team exhibits exceptional excellence and represents diverse expertise, encompassing esteemed researchers, engineers, and security professionals. Chaos Labs has garnered its experience and skills from renowned organizations, including Google, Meta, Goldman Sachs, Instagram, Apple, Amazon, and Microsoft. Additionally, the team boasts members who have served in esteemed cyber-intelligence and security units like Israel’s 8200 units, Talpiot, and the Ministry of Defense Financial Strategy Office, further contributing to their unparalleled capabilities.
Chaos Labs brings a wealth of experience in both the field of decentralized finance and the stewardship of real-world assets.
Scope of Work
Our collaboration will focus on the development of research-driven methodologies, which will lay the foundation for a software-driven platform offering the following critical functions for the Renzo community:
- AVS Risk Framework
- LRT Risk Framework
- Parameter Recommendations Platform
- Risk and Observability Analytics Platform
- Risk Oracle Integrations
Together, these platforms will provide Renzo with the tools to operate a secure, scalable, and efficient restaking network, setting the stage for long-term success and industry leadership.
Proposed Scope of Ongoing Risk Management
Following the establishment of the AVS Risk Framework and Token Risk Framework, Chaos Labs will provide continuous risk management services, which include:
- Evaluating the risk of new AVSs seeking allocation
- Proposing allocation amounts for new AVSs
- Conducting ongoing risk evaluations of AVSs and reallocation recommendations
- Performing ongoing risk assessments for staking tokens
- Conducting ongoing risk assessments of reward token management
AVS Risk Framework
Chaos Labs’ AVS risk framework is designed to address solvency risks that arise from validating additional modules, specifically in relation to the incremental yield provided. These risks primarily manifest through potential slashing and its impact on regular protocol functioning. Our liquidity risk framework also addresses the liquidity risks associated with committing a stake for a predefined period given Renzo’s appetite for regular delegation maintenance.
Given the nascent nature of restaking through Eigenlayer, the factors incorporated into our AVS risk frameworks will evolve as the market develops.
Key Features Contributing to AVS Slashing Risk:
- Diversification of Stake Across AVSs:
- Spreading stakes across multiple AVSs helps mitigate the risk of significant losses due to slashing in any AVS.
- Slashing Terms:
- Understanding the specific conditions under which slashing can occur is crucial for assessing the overall risk profile.
- Yield:
- Evaluating yield in terms of rate and the type of token received helps one understand the potential returns against the risks taken.
- Reward Token Liquidity and Volatility:
- Analyzing the impact of various reward tokens on the protocol’s overall stability and yield volatility.
- Diversification of Validators:
- Ensuring a diverse set of validators reduces the risk of correlated failures and slashing events, enhancing overall protocol stability.
Chaos Labs continuously monitors these factors and adjusts the AVS risk framework accordingly to ensure it remains robust and reflects evolving market conditions.
Custom Risk Evaluation for Renzo
While the data and risk vectors remain consistent across all restaking protocols, the considerations and preferences of each protocol can vary significantly. To address Renzo’s specific needs, the Chaos Research team will work closely with the Renzo team to tailor the risk framework. This collaboration ensures that the framework aligns with Renzo’s unique preferences and strategic objectives. By customizing the risk framework, we can better support Renzo’s goals, providing a more relevant and effective risk management solution. This approach allows us to incorporate Renzo’s specific risk tolerance, operational strategies, and overall vision into the framework, thereby enhancing its practical utility and relevance.
Risk Management Dashboards
Chaos Labs’ risk dashboards are meticulously designed to identify and diagnose risks in advance. They incorporate key decision-making inputs to empower users with real-time data, enabling prompt and informed actions.
Our risk dashboards initially focus on the liquidity dynamics of ezETH across different chains. As Renzo stakes are pooled across additional services, we will expand these dashboards to encompass comprehensive liquidity and solvency risk assessments.
ezETH Liquidity Dashboard
- Total Liquidity Distribution:
- Monitor liquidity distribution across all DEXs on each chain.
- DEX Pool Data:
- A detailed table displaying information on each significant DEX pool, including:
- Base APR
- Incentive APR
- TVL
- Liquidity concentration
- This helps in optimizing incentives where they are most needed.
- A detailed table displaying information on each significant DEX pool, including:
- Swap Size and Realized Slippage Distributions:
- Analyze the distribution of swap sizes and realized slippage on each chain to determine the necessary liquidity depth requirements.
These dashboards are crucial for managing and optimizing Renzo’s liquidity and solvency, ensuring robust risk management, and enhancing overall protocol stability.
Chaos Labs’ Expertise and Approach
Industry Experience: Chaos Labs has extensive experience managing risks within the DeFi ecosystem, having successfully applied its rigorous methodologies to significant protocols such as Aave, GMX, dYdX, LayerZero, Gearbox, Ethena, Arbitrum, and Optimism. Leveraging these battle-tested techniques, Chaos Labs will fortify Renzo, delivering the same high level of service and rigor to other industry leaders.
Chaos Labs’ Approach:
- Tailored Risk Assessment: We will conduct a precise risk assessment designed explicitly for LRTs. This collaborative process ensures the framework aligns with Renzo’s business objectives while maintaining robust security and risk management practices.
Implementation and Future Enhancements
Chaos Labs is dedicated to providing a robust and nuanced LRT risk framework that addresses the real challenges faced by the Renzo restaking network. By integrating AVS selection and incentive structures into our analysis, we ensure a comprehensive evaluation of risks, contributing to the network’s long-term stability and growth.
Shortly after publication of the LRT methodology, we will launch an advanced dashboard that offers detailed data and visualizations, enabling users to effectively apply our enhanced LRT risk framework to their tokens. This tool will empower the Renzo community to understand better and manage the unique risks associated with LRTs, positioning Chaos Labs and Renzo as leaders in LRT economic security and optimization.
LRT Risk Framework
Overview
Liquid Restaking Tokens (LRTs) built on EigenLayer have amassed significant value, and recent market events, along with soaring TVL, have underscored the need for a robust LRT risk framework. LRTs have quickly proliferated across DeFi platforms like Pendle and Gearbox (a Chaos Labs client) — with billions of dollars in deposits over the past year, aggregating TVL over 14 billion USD.
Managing Liquidity Risks for Liquid Restaking Tokens
LRTs face significantly more complex liquidity risks than LSTs. Their balance sheet resembles a bank’s, with expectations of immediate redemption and term commitments in AVS-committed security. These commitments are non-homogeneous across the LRT ecosystem, making liquidity risk management crucial for earning market confidence.
Part of the work will include the evaluation and recommendation of maximum exposure to any single reward token and ongoing recommendations for the part of reward tokens.
Differentiating LRT and LST Risks
Existing frameworks typically highlight standard LST risks but overlook the specific risks associated with LRTs. Chaos Labs addresses this gap by incorporating nuanced restaking attributes into our LRT risk methodologies. This approach allows us to identify and optimize all relevant factors, ensuring a comprehensive risk management strategy.
Chaos Labs’ Methodologies
- Nuanced Restaking Attributes:
- Our methodologies consider LRTs’ unique characteristics, such as the diversity of AVS commitments and their non-homogeneity across the ecosystem.
- We focus on both immediate redemption expectations and term commitments, providing a balanced view of liquidity risk.
- Data-Driven Risk Frameworks:
- Chaos Labs develops risk frameworks that output data-driven, optimized parameter recommendations.
- These frameworks are designed to provide actionable insights and strategies for managing LRT liquidity risks effectively.
Staking Tokens
While enabling the staking of a wide range of tokens presents a significant opportunity, it also involves substantial risk. As part of the LRT Risk Framework, Chaos Labs will implement a methodology to evaluate the feasibility of staking additional tokens. This evaluation will include:
- Price Volatility: Assessing how the token’s price volatility can affect ezETH’s profile and AVS security.
- Token Liquidity: Analyzing the impact of token liquidity on growth and AVS security.
This methodology will also be applied to assess the reward tokens of AVSs. It will be incorporated into the AVS Risk Assessment Methodology to optimize AVS selection and allocation amounts.
On Going AVS and Asset Recommendations
As part of our ongoing commitment to optimizing risk management for Renzo, Chaos Labs will thoroughly analyze the ecosystem and build custom agent-based simulations. These simulations will leverage real-world protocol dynamics and on-chain behaviors to pressure test and optimize Renzo, identifying potential vulnerabilities and opportunities for improvement. By analyzing the system this way, we can gain a more comprehensive understanding of the factors that impact protocol health and stability, enabling us to make data-driven recommendations.
AVS and Asset Recommendations
We will utilize our AVS Risk Methodology and LRT Risk Methodology to run ongoing analysis and simulations in order to provide Renzo protocol with recommendations for:
- New AVS selection
- New AVS allocation
- Existing AVS risk levels
- Existing AVS allocations
- New staking tokens
- Reward tokens management
In the dynamic and rapidly evolving landscape of DeFi, traditional risk management has remained frustratingly static, often lagging behind market volatility. The integration of Chaos Labs’ recently launched Risk Oracles marks a transformative advancement in on-chain risk management. These oracles facilitate the dynamic configuration of risk parameters in real-time, thereby obviating the inefficiencies of manual updates and enabling prompt, automated adjustments on-chain. This technological innovation ensures that Renzo can seamlessly align with market fluctuations, enhancing both security and operational efficiency. By translating Chaos Labs’ sophisticated risk assessments into actionable, protocol-approved updates, Risk Oracles empower Renzo to achieve unparalleled scalability and responsiveness in risk management, perfectly attuned to the exigencies of the DeFi ecosystem.
Deliverables
Pricing
Chaos Labs proposes an 18 month engagement at $480K in USDC per year for this full suite of risk management solutions discussed above.
The compensation should be made as quarterly payments of $120K per quarter, paid at the beginning of each quarter.
For the first quarter, we’re asking for 2,600,000 REZ