The below provides a summary of the Methodology Enhancement Proposal. A more detailed version is available in Credora documentation.
Overview
Credora is proposing the introduction of a Diversification Analysis Adjustment in the Morpho Vaults methodology. This enhancement is intended to capture concentration risk across vault exposures, further differentiating ratings outputs.
Current Methodology Recap
Credora’s Morpho risk assessment framework applies a simulation approach to calculate the Probability of Significant Loss (PSL) for a given Morpho Market. A loss is deemed significant when it exceeds 1% of the total outstanding supply. The simulations incorporate collateral asset risk, market activity, volatility, oracle configurations, and liquidity.
These Morpho Market PSLs are aggregated at the vault level according to the Vault Methodology. The Anchor PSL for the vault methodology is a weighted average of the individual market-level PSLs, where weights reflect the vault’s proportional exposure to each market. The Vault Methodology subsequently incorporates adjustments for curator track record and vault governance mechanisms.
Enhancement Proposal
The diversification adjustment proposed aims to measure the diversification across three distinct layers within a curated Morpho vault. Credora calculates a notch adjustment pertaining to each of these distinct layers, which are then added to arrive at the final notch adjustment.
- Protocol Exposure: Evaluates the degree to which a vault is concentrated in markets that originate from the same protocol or ecosystem (e.g. USR, wstUSR, RLP)
- Collateral Type Exposure: Captures concentration risk based on underlying asset similarity (e.g. wstETH, cbETH, rETH).
- Market Concentration: Evaluates the distribution of exposure across individual markets, independent of protocol or collateral groupings. The analysis utilizes the Herfindahl-Hirschman Index (HHI), a standard measure of concentration, computed as the sum of squared market weights.
Following the calculation of a vault’s Probability of Significant Loss (PSL), this enhancement introduces the application of a Diversification Adjustment to account for concentration-related risks. Specifically, it is designed to differentiate vaults based on the extent to which they diversify across protocols, collateral types, and markets. Vaults exhibiting high concentration would receive a negative adjustment, while those demonstrating meaningful diversification would receive no or a positive adjustment, depending on final notch calibration.
Next Steps
Credora is actively refining this methodology and seeking feedback from market participants to ensure a robust and transparent assessment framework. We encourage the community to engage in discussions, provide insights on validator risks, and contribute to the refinement of this methodology before its formal integration into the Credora Token Rating Framework. This includes feedback on the magnitude of the modifier, in the context of the Credora Token Rating Framework.
Become a Contributor on the Credora Forum to join discussions on the methodologies. Contributors can actively engage with methodology documentation and suggest enhancements. To apply to become a Contributor click the blue banner at the top of the page or follow the steps in this article.