Liquidity Risk Score

The Liquidity Risk Score serves only as one of many financial risk dimensions. The Liquidity Risk Score does not account for other possible risks associated with DeFi protocols, such as technical risk, oracle risk, admin risk, or legal risk. These and other factors should also be considered when assessing pool risk.

The Liquidity Risk Score ranges from 0 (low risk) to 100 (high risk) and is intended to measure liquidity resilience during possible market stress scenarios. The Liquidity Risk Score combines supplier and borrower concentration, 30-day average utilization, and the pool's share of total DeFi stablecoin supply.

Supplier and Borrower Concentration

The supplier and borrower concentration is measured using the Herfindahl-Hirschman Index (HHI). First, we measure the HHI of suppliers and borrowers separately. Thereafter, we combine the two HHI metrics to construct an aggregated market-concentration term:

$$\tilde{H} \;=\; \sqrt{H_{\text{sup}}^{2} + H_{\text{bor}}^{2}}, \qquad \bar{H} \;=\; \frac{\tilde{H}}{10\,000}$$

The formula combines supplier and borrow concentration and then normalises it to a 0 - 1 range.

Non-Linear Utilization Penalty

The utilisation risk has a gentle slope for healthy levels (< 80 %) and rises steeply once a kink is crossed. Mathematically:

$$u_{\text{score}} \;=\; m\,u \;+\; \left( \frac{1 - m\,u_{\text{th}}}{1 - u_{\text{th}}} \;-\; m \right) \frac{u - u_{\text{th}}}{1 + e^{-k\,(u - u_{\text{th}})}}.$$

where:

• m (baseline sensitivity) = 0.25

• k (steepness of the jump) = 32

• uₜₕ (utilization threshold where liquidity starts to tighten) = 0.8

Combine Utilization and Concentration

$$\text{raw\_score} \;=\; u_{\text{score}} \bigl[(1 - w_H) + w_H\,\bar{H}^{\,2}\bigr], \qquad \text{with } w_H = \text{weight\_hhi}.$$

where:

• weight_hhi = 0.5

Discount for Pool Size

Large pools represent a bigger share of the aggregate stablecoin market and are assumed to be harder to drain in a stress event, hence the logarithmic discount. A higher α makes the discount stronger.

$$\text{size\_ratio} = \frac{\text{pool\_supply}} {\text{total\_defi\_stablecoin\_supply}}, \qquad \text{discount} = \frac{1}{1 + \alpha \ln\!\bigl(1 + \text{size\_ratio}\bigr)}.$$

where:

• α = 2.5

The fixed parameter values and assumptions shown here correspond to the initial release of the Liquidity Risk Score methodology. They may be updated as new data, feedback, or insights emerge. Any revisions will be recorded in the Sphere Documentation Portal.

Final Score

The final score is bounded between 0 (lowest liquidity risk) and 100 (highest liquidity risk).

$$\text{Liquidity Risk Score} \;=\; (\text{raw\_score}\times\text{discount}) \times 100.$$