Risk Philosophy
Galaxy’s risk framework is designed to bring institutional-grade discipline to DeFi yield strategies.
Galaxy applies a structured, systematic review process to every collateral type and market under consideration for inclusion in its vaults. This process is designed to identify and quantify the principal risk dimensions of each proposed allocation before any depositor capital is exposed, and to establish ongoing monitoring standards that remain operative throughout the vault's life. The process is the same regardless of whether a vault is open or custom; all markets in all Galaxy vaults pass through the same review criteria.
Liquidation Simulations and Liquidity Analysis
The first and most consequential element of Galaxy's collateral review is an assessment of whether a given market can sustain orderly liquidations under stressed conditions without accruing bad debt. This involves constructing liquidation simulations that model collateral price declines across a range of severity levels, including tail scenarios that may seem improbable under normal conditions but that DeFi history has demonstrated can materialize rapidly. For each simulation, we assess whether the liquidation incentive structure, the secondary market liquidity of the collateral asset, and the Morpho V2 market's loan-to-value parameters are collectively sufficient to ensure that positions can be wound down before bad debt accrues.
Secondary market liquidity analysis is a central input to this simulation. For a liquidation to occur without slippage that creates losses for the vault, there must be adequate depth in the markets where collateral is sold. We assess this liquidity at multiple levels, not only at current market conditions but under scenarios where market depth has contracted, as it reliably does during broad risk-off events. Collateral assets that cannot demonstrate sufficient secondary liquidity under stress are excluded from Conservative-tier vaults and subject to enhanced scrutiny in Moderate-tier configurations.
Utilization and Idle Liquidity Monitoring
Once a market is included in a vault, Galaxy monitors utilization rates and idle liquidity on an ongoing basis. Utilization directly affects the ability of depositors to withdraw from a market. Markets operating at persistently high utilization present increased withdrawal friction and may also signal structural imbalances between supply and demand that warrant reassessment of the market's risk profile.
Idle liquidity monitoring also serves as an early indicator of changing market dynamics. A market that was adequately liquid when it was selected may experience shifts in borrower demand, collateral composition, or competitive dynamics that alter its risk characteristics. Ongoing liquidity monitoring allows Galaxy to identify these shifts before they manifest as depositor-facing liquidity constraints or elevated bad debt risk.
Real-Time Exploit and Anomaly Monitoring
Galaxy integrates Hypernative across all vaults to provide continuous, real-time monitoring of smart contracts associated with vault collateral and markets. Hypernative's infrastructure detects on-chain conditions that may signal an impending exploit; including anomalous transaction patterns, unusual contract state changes, flash loan activity targeting associated protocols, and other precursors to known attack vectors. When Hypernative identifies an anomaly meeting alert thresholds, Galaxy Galaxy can programatically update the optimal allocation to account for the affected markets.
This monitoring is applied not only to the Morpho contracts directly used by the vault, but also to the smart contracts governing each collateral asset - including the LST protocols, restaking platforms, and synthetic asset issuers that may back Moderate-tier markets. The attack surface of a DeFi vault extends to every protocol in the collateral stack, and Galaxy's monitoring infrastructure reflects that reality.
Bad-Actor Screening
Galaxy integrates TRM Labs to screen for potential activity by bad actors within the protocols and contracts associated with its vaults. TRM Labs provides blockchain intelligence that identifies addresses and transaction patterns associated with illicit activity, sanctions exposure, or known theft events. Galaxy applies this screening at the protocol level as part of its broader operational compliance posture.
This layer of screening is consistent with the standards Galaxy applies in its broader institutional business. The decentralized and permissionless nature of DeFi protocols means that Galaxy cannot prevent flagged actors from depositing into the underlying infrastructure, but it can monitor for their presence and factor that information into ongoing vault risk assessments.
Ongoing Review and Collateral Changes
Collateral selection is not a static decision. Galaxy reviews the collateral composition of each vault on an ongoing basis, and is prepared to add or remove collateral types as market conditions, protocol developments, or new information warrants.
Depositors should understand that the collateral universe of a vault may change over its life. Subject to the vaults pre-defined timelocks, these changes are curatorial decisions made within the bounds of the vault's stated parameters, and they are intended to protect the vault's risk profile rather than to pursue higher yield. Material changes to collateral composition are reflected in vault documentation as they occur and are subject to all applicable timelock restrictions.
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