Diversification Risk Modeling

Diversification risk modeling is the quantitative analysis of how well a portfolio or protocol is protected against systemic shocks through the holding of non-correlated assets. While diversification is a standard risk management technique, it is often misunderstood in crypto, where most assets exhibit high positive correlation during crashes.

Effective modeling requires testing how different asset classes perform under extreme stress, not just during normal conditions. This helps protocols set realistic collateral requirements and avoid over-reliance on a single asset type.

By building models that explicitly account for the tendency of assets to become highly correlated during crises, designers can create more resilient systems.