Tail Risk Strategy

Tharwa's capital preservation philosophy is grounded in one core principle: don't optimize for the average, prepare for the extremes. This approach is embedded throughout our portfolio management system.

While many DeFi protocols chase high yields or rely on historical averages, Tharwa designs every portfolio decision around tail risks: the rare, severe events that can permanently impair user capital or break protocol mechanics.

This approach is embedded at every level of the system, from the Confluence Engine’s optimization logic to treasury controls and vault design.

What Is Tail Risk?

Tail risk refers to the possibility of rare, high-impact losses that lie outside the normal distribution of expected outcomes: the “black swan” events that most models ignore.

In practice, this includes:

• Sudden interest rate shocks

• Liquidity freezes in RWA markets

• Commodity crashes or geopolitical disruptions

• Regulatory freezes on underlying custodians

• On-chain instability, bridge failures, or oracle outages

These events might be statistically rare, but they are inevitable over time, and ignoring them is one of the fastest ways for a protocol to collapse under pressure.

How Tharwa Manages Tail Risk

1

CVaR-Based Portfolio Optimization

What it does: Prioritizes portfolio allocations that perform well even in worst-case scenarios

Result: Yield that's not just high, but resilient under stress.

2

Asset Class Caps: Preventing Concentration Risk

Diversification Rules:

Why Caps Matter: Prevents any single asset from dominating the portfolio, ensuring correlation breakdowns don't cascade.

3

Multi-Layered Defense Systems

Diversified Yield

Geographic Diversification:

• UAE real estate income

• Global sukuk markets

• International commodity exposure

• Multi-currency revenue streams

Temporal Diversification:

• Short-term sukuk (3-12 months)

• Medium-term real estate (1-5 years)

• Long-term infrastructure (5+ years)

Peg Defense

Liquidity Management:

• Liquid reserve buffers

• Market maker incentives

• OTC routing capabilities

• Emergency liquidation protocols

Stress Response:

• Automated circuit breakers

• Dynamic reserve allocation

• Cross-asset liquidity provision

AI Rebalancing

Automated Response:

• Real-time stress detection

• Proactive position adjustments

• Risk-off reallocation

• No governance delays

Human Oversight:

• Advisory mode currently

• Manual review of recommendations

• Gradual autonomy transition

Example Scenario: Interest Rate Spike

If U.S. interest rates unexpectedly spike:

• Treasury yields may become more attractive, causing capital outflows from other sectors

• Real estate and gold may draw down

• Some sukuk instruments may underperform

Rather than react afterward, Tharwa’s system:

• Detects yield curve inversion signals early via AI

• Reduces exposure to rate-sensitive assets

• Leans into shorter-duration or less-correlated instruments

• Limits the hit to the protocol by proactively managing composition