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Abstract

Stablecoin depeg risk refers to the potential for stablecoins to fail to maintain their peg, resulting in significant fluctuations in value beyond a minimal percentage on the open market. As Endaoment holds all idle cash as USD Coin (USDC), this risk is associated with potential financial losses. This risk is further categorized into two main areas: traditional stablecoin depeg risk and onchain stablecoin depeg risk. Given the volatile nature of alternative assets, including cryptocurrencies and other onchain assets, price impacts at the moment of trade execution are possible and must be anticipated and managed. Additionally, operating in a rapidly evolving technological landscape introduces risks related to changes in the tech stack that can impact operations. Effective management of stablecoin depeg risks is essential to 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 the safe stewardship of cash and cash equivalents used in our financial products, ensuring the solvency of underlying assets used by stablecoin providers. We manage stablecoin depeg risks by conducting regular analyses of underlying financial data, benchmarking against alternative offerings in the market, and adhering to stringent criteria for stablecoin selection. Our approach includes the use of centralized, USD-pegged, and publicly audited stablecoins to minimize exposure to depeg events. 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. Stablecoin Inventory and Classification
    • Maintain a comprehensive inventory of all stablecoins held, categorizing them based on their pegging mechanism, centralization, and audit status.
  2. Market and Liquidity Analysis
    • Conduct regular market research to evaluate the liquidity and stability of stablecoins, assessing factors that could contribute to depegging events.

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Risk Mitigation

  1. Stablecoin Selection Criteria
    • Define and enforce criteria for the selection and use of stablecoins, ensuring they are:
      • Pegged to USD: Stablecoins must maintain a peg to the US Dollar.
      • Centralized: Stablecoins should be managed by reputable centralized entities.
      • Publicly Audited: Stablecoins must undergo regular and transparent audits by independent third parties.
  2. Diversified Stablecoin Holdings
    • While currently limited to USDC, consider diversifying stablecoin holdings in the future to spread risk across multiple stablecoin providers that meet our selection criteria.
  3. Regular Financial Analysis
    • Conduct regular analyses of the underlying financial data supporting stablecoins to ensure their solvency and ability to maintain the peg.
  4. Emergency Depeg Action Plan
    • Develop and maintain an emergency action plan to respond swiftly in the event of a stablecoin depegging, minimizing financial losses and maintaining operational continuity.

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Monitoring and Reporting

  1. Performance and Peg Monitoring
    • Regularly monitor the performance and peg stability of stablecoins to ensure they maintain their value relative to the reference asset (USD).
  2. Transaction Monitoring
    • Continuously monitor transactions involving stablecoins to detect any irregularities or signs of depegging.
  3. Incident Reporting Mechanism
    • Provide a secure and anonymous system for reporting suspected depegging events or irregularities in stablecoin performance.

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Operational Controls

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Policies and Procedures

  • Documentation
    • All stablecoin depeg 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 market changes.

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Specific Stablecoin Depeg Risk Controls

  1. Performance/Peg Monitoring
    • Regularly monitor the performance and peg stability of stablecoins to ensure they maintain their value relative to the reference asset (USD).
  2. Stablecoin Use Criteria
    • Define and enforce criteria for the selection and use of stablecoins in transactions and holdings, ensuring they meet established standards.
  3. De-Peg Emergency Action Plan
    • Develop and maintain an emergency action plan for scenarios where a stablecoin loses its peg, including steps to lock affected portfolios, inform donors, and exit positions safely.
  4. Third-Party Technical Audits
    • Engage reputable third-party firms to conduct comprehensive technical audits of smart contracts and stablecoin protocols to identify and mitigate vulnerabilities.
  5. Permissions Testing
    • Conduct rigorous testing to ensure that smart contract permissions are correctly configured to prevent unauthorized access.
  6. Multisignature Wallet Use
    • Utilize multisignature wallets for all significant transactions to enhance security and reduce the risk of unauthorized access or theft.
  7. Feature Testing
    • Implement a thorough testing protocol for new features before integrating them into smart contracts to ensure their security and functionality.
  8. Bug Bounty Program
    • Establish and maintain a bug bounty program to incentivize external security researchers to identify and report vulnerabilities.

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Vendor Management

  • Compliance Standards
    • Implement stringent controls and regular reviews of vendor relationships to ensure compliance with Endaoment’s stablecoin depeg risk management and security standards.

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Segregation of Roles and Cross Training

  • Segregation of Duties
    • Ensure that critical stablecoin risk management procedures and systems have segregated duties to prevent any single individual from having full control over any process without oversight.
  • Cross Training
    • Implement cross-training programs to ensure that each procedure and system is understood and that tasks can be performed by at least two employees.
  • Approval Processes
    • Maintain segregated claim diligence and approval processes to uphold checks and balances.