Vault Manager

There will be multiple assets in the Vault portfolio, such as tokenized commodities, currencies, and securities.

To minimize the risk that a sudden drop in the prices of Vault assets reduces the Vault level to below the Vault Target we use three types of diversification:

• Diversification across asset classes • Diversification across issuers • Diversification across jurisdictions

Diversifying the Vault across asset classes mitigates systemic risk associated with particular asset classes. When some assets drop sharply, a well diversified portfolio only drops a little bit, and could even stay stable if it contains anti-correlated assets.

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Diversifying the Vault across issuers mitigates counterparty risk originating from the asset issuers themselves. While assets added to the Vault will be thoroughly vetted, asset tokenization involves off-chain components, and thus necessarily has some risk from centralization. In the worst case, an issuer may steal some or all of the underlying assets backing the tokens they issued, which would lead to a sharp drop in the value of their issued tokens. We mitigate this risk by maximizing the diversification of issuers. For each asset type in the vault we will spread out our exposure to that asset across as many independent issuers as possible.

Diversifying the Vault across jurisdictions mitigates counterparty risk originating from the jurisdictions of Vault asset issuers. Even if we can trust issuers, governments may threaten to shut issuers down if they don’t give up the assets backing their tokens. Asset seizure or issuer shutdown will likely lead to sharp drops in the value of that issuer’s tokens. To protect against this type of counterparty risk, for each asset class, we will spread out our exposure to the asset among issuers from as many jurisdictions as possible.

In the short-run, due to the limited availability of Vault assets, the Vault will be over- capitalized to provide additional security.10 The Vault ratio will gradually decrease to 1. The ratio decreases in response to two factors: increased availability of high quality assets, and improved quality of existing Vault assets.

When new high quality assets are added to the Vault, we increase the diversification and resilience of our overall Vault portfolio. Since the amount of overcapitalization needed to stay safe decreases as our portfolio diversification increases, when we can add new assets to the vault we will lower the Vault Ratio.

Likewise, when the quality of an existing Vault asset improves, we need slightly less overcapitalization to stay safe. For example, when an issuer improves their safety stan- dards or increases jurisdictional diversification, the counterparty risk of their asset de- creases. Thus, in these cases we will also reduce the Vault Ratio.

The management policy of the Vault Ratio and the Vault portfolio changes depending on the maturity of the system. The management starts out centralized and becomes fully decentralized over time. In the early life of the system, portfolio changes are initiated by the development team making a proposal for how to update the portfolio. Proposals can include additions/removals of assets, changes to the target allocation of an asset, and updates to the Vault Ratio.