Risk management is central to Nexo’s mission of ensuring the stability of our business, and trust for our clients. With a framework designed to account for diverse risk variables and mitigate the effects of volatility in the digital assets market, Nexo has implemented advanced protocols to protect assets, source liquidity, and uphold the sustainability of lending, borrowing, and the various other services available on our platform.

In this article, you will find an outline of the types of risk in Nexo’s ecosystem, as well as our approach to managing them to foster sustainable growth for our clients.

What is risk?

In a dynamic industry like that of digital assets, risk is the potential for an event or market movement to negatively impact a business’s assets, security, or operational stability. For a company like Nexo, risk assessment is crucial in order to offer secure products that clients can trust.

Risk can arise from numerous sources, each of which demands a targeted management approach. Below are the primary types of risk we track at Nexo and how they manifest:

Market risk: The potential for asset value to decline due to volatility and market fluctuations. We monitor this in relation to the credit side of our business
Liquidity risk: The risk that a business or clients may not be able to execute trades or access funds due to insufficient liquidity.
Credit risk: The possibility that counterparties fail to meet financial obligations, affecting loan and interest repayments.
Concentration risk: This entails large exposures with similar risk characteristics. This can occur due to high exposure to a single counterparty, related or connected counterparties, collateral, asset, or similar factors.
Operational risk: Risks related to system failures, human error, or unexpected interruptions in platform operations.
Third-party risk: The potential loss or inaccessibility of assets due to issues with asset storage or external custodians.
Regulatory risk: The risk associated with changes in legal requirements, which may affect operations or assets.
Financial stability risk: Financial stability risk arises when a company lacks the necessary capital, liquidity, or reserves to operate effectively, meet client commitments, or comply with regulatory requirements.
Market abuse risk: Market abuse risk involves threats such as insider trading and market manipulation that can compromise operational integrity and stakeholder trust.
Fraud risk: Fraud risk involves potential threats such as insider trading, market manipulation, and fraudulent schemes, which may originate from internal or external actors.

How does Nexo assess and manage risk?

Each type of risk in Nexo’s ecosystem demands a unique, tailored approach. We prioritize security and transparency in all processes, with continuous evaluations to uphold the highest standards for our clients.

Collateralization of assets

Nexo’s lending and borrowing services are secured by a robust collateralization framework to protect client assets. Our approach assesses factors such as:

Traded volume,
Asset liquidity,
Historical market performance,
Wallet concentration,
Real-time liquidity, and
Volatility monitoring across multiple exchanges.

Each platform-granted loan is fully collateralized, eliminating counterparty risk due to client insolvency and preserving clients’ funds even during market downturns.

Automatic repayments and stress testing

Nexo’s fully automated platform safeguards both the company’s stability and its clients by preventing unsecured debts through automatic repayments. This is integral to maintaining loan collateralization, a core function of Nexo’s risk management strategy. When an asset’s value declines to a pre-defined threshold, the system autonomously initiates partial loan repayments by selling small increments of collateral to restore the required loan-to-value (LTV) ratio. This automated approach eliminates human bias, minimizes errors, and ensures appropriate action – maintaining a stable and balanced loan book even amid volatile market conditions.

Furthermore, rigorous risk testing underpins our automated borrowing and lending systems. By conducting Monte Carlo simulations and testing various price movement scenarios, we are prepared to manage significant market fluctuations. Our assessments focus not only on volatility but also on liquidity, loan terms, and concentration levels, ensuring a balanced and resilient loan book.

Listing and delisting of assets

Selecting assets for the platform involves thorough risk analysis. Nexo evaluates asset liquidity, trading volume, volatility, and on-chain metrics such as wallet activity and holder concentration. This process is continuously updated, and if certain risk standards are no longer met, Nexo may delist the asset. Clients are given ample time to adjust their holdings during delistings, ensuring minimal impact and maintaining transparency.

Liquidity monitoring

To offer seamless trading, we prioritize liquidity management for all listed assets. Our proprietary algorithm aggregates liquidity from multiple sources, optimizing trades across different asset pairs. This dynamic setup enables users to access the liquidity needed for transactions, maintaining smooth and reliable exchanges on the platform. Nexo’s due diligence process includes sentiment analysis, on-chain data monitoring, and withdrawal activity, ensuring exchanges meet our standards for liquidity and security.

Asset custody

Ensuring optimal custody solutions for client funds is an utmost priority at Nexo. By storing assets both in hot wallets off exchanges and cold wallets in trusted custodians like Fireblocks, Ledger Vault, and other partners, we limit exposure to counterparty risk. Nexo employs automated systems to transfer funds to exchanges as needed for business operations, rather than storing assets there for extended periods. This approach enhances security by mitigating risks associated with platform or custodial failures.

Macro environment monitoring

We track global and crypto market trends, analyzing volatility and simulating market responses to economic events, announcements, and policy changes. Nexo’s monitoring framework is supported by statistical models that assess both industry-specific and broader macroeconomic factors. This vigilance allows us to anticipate potential impacts on client assets and adjust our approach to risk management as market conditions evolve.

By addressing each aspect of risk with a rigorous and adaptive framework, Nexo remains committed to building a resilient ecosystem for its clients. Our continuous assessment and management strategies serve as the foundation of Nexo’s reliability in a fast-paced and ever-evolving digital assets landscape.

These materials are accessible globally, and the availability of this information does not constitute access to the services described, which services may not be available in certain jurisdictions. These materials are for general information purposes only and not intended as financial, legal, tax or investment advice, offer, solicitation, recommendation, or endorsement to use any of the Nexo Services and are not personalized, or in any way tailored to reflect particular investment objectives, financial situation or needs.

Digital assets are subject to a high degree of risk, including but not limited to volatile market price dynamics, regulatory changes, and technological advancements. The past performance of digital assets is not a reliable indicator of future results. Digital аssets are not money or legal tender, are not backed by the government or by a central bank, and most do not have any underlying assets, revenue stream, or another source of value.

Independent judgment based on personal circumstances should be exercised, and consultation with a qualified professional is recommended before making any decision.