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Abstract

Market and Liquidity risk refers to the potential impediments introduced into the buy/sell flow for assets. Given the low and fluctuating liquidity of many onchain assets, price impacts at the moment of trade execution are possible and must be mitigated wherever possible. At a minimum, this risk should be communicated to users to facilitate informed decision-making. This risk includes, but is not limited to, slippage, price impact, and Miner Extractable Value (MEV) attacks. Effective management of market and liquidity risks is essential for maintaining financial stability, ensuring regulatory compliance, and upholding the trust of our stakeholders and donors.

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Policy Statement

Endaoment is committed to providing investment tools that connect users to options with optimal liquidity while preventing unexpected sub-optimal trade outcomes. We manage market and liquidity risks through regular code reviews and audits, as well as ongoing market monitoring. Compliance with this policy is mandatory for all employees, contractors, board members, and representatives acting on behalf of Endaoment.

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Risk Management Strategy

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Risk Assessment

  1. Liquidity Risk Inventory and Classification
    • Maintain a comprehensive inventory of all assets, categorizing them based on liquidity and market volatility.
  2. Market Analysis
    • Conduct regular market analysis to identify and evaluate potential liquidity risks associated with different asset classes and trading platforms.

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Risk Mitigation

  1. Diversified Trading Platforms
    • Utilize a diversified approach to trading by engaging with centralized exchanges (CEX), decentralized exchanges (DEX), and over-the-counter (OTC) desks to ensure sufficient market depth and reduce dependency on any single platform.
  2. Slippage and Price Impact Controls
    • Implement slippage and price impact controls on all donations and portfolio movements (e.g., activities associated with atomic swaps onchain) to minimize adverse effects on transaction prices.
  3. Smart Contract Diligence
    • Conduct thorough reviews of smart contracts associated with onchain investment portfolios via independent third-party technical audits to ensure operational security and compliance.
  4. Order Book Monitoring
    • Monitor order books across exchanges to ensure sufficient depth and to detect any manipulative practices that could affect liquidity and market stability.

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Operational Controls

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Policies and Procedures

  • Documentation
    • All market and liquidity risk management policies and procedures are thoroughly documented, with both internal and external-facing components where relevant.
  • Annual Review
    • Conduct an annual review of policies, updating them as necessary to reflect current best practices and regulatory changes.

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Specific Market and Liquidity Risk Controls

  1. Portfolio Volatility Monitoring and Emergency Procedure
    • If the Board, a committee of the Board, or if both the CEO and COO determine that an invested asset is overly volatile, the following actions will be taken:
      1. Lock the specific portfolio in question through the cap system (set to 0).
      2. Inform donors of the closed portfolio.
      3. Force exit all positions from the portfolio into affiliated funds.
  2. Order Book Monitoring
    • Continuously monitor order books across exchanges to ensure sufficient liquidity and to detect any manipulative trading practices.
  3. CEX/DEX/OTC Desk Diversity
    • Ensure a diversified approach to trading by utilizing centralized exchanges (CEX), decentralized exchanges (DEX), and over-the-counter (OTC) desks to enhance liquidity and reduce market impact.
  4. Slippage Controls
    • Embed adequate slippage controls into all transactions, including donations and portfolio movements (e.g., atomic swaps onchain), to minimize unexpected price deviations.
  5. Price Impact Controls
    • Implement price impact controls to ensure that large transactions do not adversely affect market prices, maintaining transaction efficiency and fairness.

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Vendor Management

  • Compliance Standards
    • Implement stringent controls and regular reviews of vendor relationships to ensure compliance with Endaoment’s market and liquidity risk standards.

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Segregation of Roles

  • Segregation of Duties
    • Ensure that critical market and liquidity risk procedures and systems have segregated duties to prevent any single individual from having full control over any process without oversight.
  • Approval Processes
    • Maintain segregated claim diligence and approval processes to uphold checks and balances.