# Risk rating model
#### Structured classification in a data-scarce environment
DeFi lacks decades of statistical default history. Numeric scoring systems create false precision.
Shift uses a criteria-based letter rating framework instead.
Each Asset and Protocol receives an internal rating:
AAA — Minimal relative risk\
AA — Very low risk\
A — Low risk\
BBB — Moderate risk\
BB — High risk\
B — Highest acceptable risk
These [ratings](https://medium.com/@SHIFT_DeFi/why-defi-risk-ratings-must-stay-cautious-and-why-well-never-chase-false-precision-f06825d635e6) are comparative within DeFi. They are not equivalent to traditional bond ratings.
#### The weakest-link principle
After rating the individual components of a strategy, Shift applies a deliberately conservative rule.
The overall strategy rating cannot exceed the rating of its weakest Building Block.
In other words, if a strategy includes even one fragile component, that fragility defines the maximum possible rating of the entire strategy.
This principle prevents strong elements from masking structural weaknesses. A highly secure protocol does not eliminate the risks introduced by a volatile asset, and a stable asset does not remove the risks of an insecure protocol.
**Example**
Consider a strategy that deposits Token A into Lending Protocol B.
After analysis, Shift assigns the following ratings:
* Token A: BB (opaque or non-transparent collateral structure and limited market history)
* Protocol B: A (strong audits, high liquidity, long operating history)
Even though the protocol itself is rated A, the overall strategy cannot receive a rating higher than BB, because the token introduces additional risk.
If the strategy introduces leverage — for example by borrowing against Token A — this does not automatically lower the base rating. Instead, leverage is treated as a strategy-level risk factor and flagged accordingly.
Such factors are considered separately from the Building Block ratings and may affect how the strategy is approved, sized, or monitored within the portfolio.
This approach ensures that strategies are evaluated based on their most fragile element, rather than their strongest one.
The goal is to avoid false confidence and to maintain a realistic view of the risks embedded in complex DeFi structures.
#### Strategy-level adjustments
Certain strategy designs introduce additional risk beyond their components:
* Leverage exposure
* Liquidation risk
* Impermanent loss sensitivity
* Lock-up periods
* Multi-step dependency chains
If strategy construction amplifies risk, the rating may be downgraded further.
Ratings determine:
* Allocation size
* Vault eligibility
#### Continuous calibration
The rating model is not static.
After each significant DeFi exploit or market event, Shift conducts structured review:
* Would the framework have identified this vulnerability?
* Were exposure limits sufficient?
* Did triggers activate as designed?
If necessary, criteria are tightened and new red flags added.
The model is formally reviewed on a recurring basis, even in stable periods.
Risk modeling evolves with the ecosystem.
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