Derivative Token Methodology

Methodologies Derivative Tokens
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Introduction

The Derivative Tokens Methodology is a comprehensive framework for assessing the risk associated with derivative tokens. Part of the Calibration Layer of the Token Rating Framework, it applies to Wrapped Tokens (WTs), Liquid Staking Tokens (LSTs), and Liquid Restaking Tokens (LRSTs).

  1. Wrapped Tokens (WT): Represent digital assets that are pegged to a cryptocurrency, relying on centralized or smart contract custody. Primary risks include custodial security and collateral integrity.
  2. Liquid Staking Tokens (LST): Represent staked digital assets, with risks stemming from validator performance, slashing events, and governance structures.
  3. Liquid Restaking Tokens (LRST): Extend staking across multiple protocols, compounding risks related to validator slashing, smart contract complexity, and operational dependencies.

The Derivative Tokens Methodology further refines outputs from the Sub-Methodology Layer, utilizing a series of Modifiers.

Key Sections

Below is an overview of the core sections covered in the methodology:

  1. Anchor PD Determination: Utilizes output from the Centralized Custody Sub-Methodology as the foundational risk of Derivative tokens.

  2. Calibration Layer Modifiers: Where the Centralized Custody Sub-Methodology is utilized, Anchor PD is refined through a set of modifiers designed to reflect risks not fully captured in the sub-methodology, including:

    • Smart Contract Risk Modifier: Evaluates audit quality and contract maturity for tokens with centralized custody dependencies.
    • Slashing Risk Factor: Adjusts PD upward for tokens exposed to validator penalties that reduce collateral value.

  3. Framework Integration: Outputs form the foundation of the Primary Layer evaluation.

Access the Full Documentation

You can view the complete Derivative Token Methodology on GitBook.

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