Insight

Anomaly Alerts: Enhancing Counterparty Risk Management

July 30, 2024

Detecting sudden changes in counterparty risk profiles can mean the difference between profit and loss. Agio Ratings' Anomaly Alerts system is designed to cut through the noise of social media and provide actionable insights based on statistical analysis. 

To help you understand more, this article explores how Anomaly Alerts helps you to manage counterparty risk more effectively, starting with a quick overview.

What are Anomaly Alerts?

Anomaly Alerts allows users to monitor and detect unexpected and sharp shifts in a counterparty's risk profile in real-time. Our algorithms do much more than flag large changes in outflows. They are designed to spot statistically significant deviations in balances and flows. This means that Agio Ratings can alert users when a counterparty’s risk has shifted in a meaningful way.

  1. Advanced statistical analysis: Our algorithms go far beyond simply flagging large changes in outflows. They employ complex statistical models to identify statistically significant deviations in both balances and flows across various crypto assets.
  2. Machine Learning integration: Machine learning continuously improves its ability to distinguish between normal market fluctuations and truly anomalous events.
  3. Historical context: Our alerts don't just look at isolated events but consider historical patterns and trends to determine what constitutes a true anomaly.
  4. Cross-asset correlation: The system identifies systemic risk using on-chain data monitoring in real time by aggregating addresses and token to have a holistic view of an entities total balance and flows.
  5. Real-time notifications: Users receive immediate alerts through multiple channels when a significant risk shift is detected, allowing for prompt action

Recent anomaly identified on XT.com

By using these advanced features, Agio Ratings can alert users when a counterparty's risk has shifted in a meaningful way. This proactive approach to risk management enables crypto firms, institutional investors, and traders to make informed decisions quickly in the fast-moving digital asset market.

Whether you're managing a crypto portfolio, overseeing exchange relationships, or monitoring counterparty risk, Anomaly Alerts provides the timely insights needed to stay ahead.

Why detecting anomalies is critical in crypto markets

Our clients know that parsing signals from noise in the crypto market is difficult. Social media platforms like Twitter/X and Telegram often amplify minor events and drown out thoughtful analysis. The result is that even the most focused teams tended to overreact to noise while missing subtle but important shifts in risk profiles.

Yet, the market's volatility and rapid movements make timely anomaly detection crucial. Prices can shift dramatically in minutes, and events affecting one entity can have cascading effects throughout the ecosystem. The collapse of FTX in 2022 is a reminder of how quickly things can unravel in the crypto space and the importance of early detection systems.

In fact, Agio Ratings' Anomaly Alerts system detected significant on-chain anomalies in the days leading up to FTX's collapse, as detailed in our article, On-Chain Anomaly Detection: The FTX Foreshock.

We've designed Anomaly Alerts to address these challenges and enable smarter risk-taking. 

Our system provides data-driven insights that cut through market noise, allowing firms to make objective decisions. This can mean reducing exposure to counterparties that have experienced genuine anomalies, potentially avoiding significant losses. 

Equally important, it can help identify situations where the market has overreacted, allowing firms to maintain or even increase exposure when a counterparty's actual risk profile remains stable.

By offering a holistic, continuous view of risk that goes beyond simple price movements or trading volumes, Anomaly Alerts empowers firms to navigate digital assets with greater confidence. 

New features in Agio’s anomaly alerts system

At Agio Ratings, we're committed to continuous improvement and innovation in our risk management tools. We understand that the cryptocurrency landscape is constantly evolving, and our Anomaly Alerts system needs to evolve with it. 

In response to client feedback and our ongoing research, we've implemented several significant enhancements to our Anomaly Alerts system. These updates are designed to provide more comprehensive coverage, deeper insights, and an improved user experience. 

#1. Expanded entity coverage

In July 2024, we increased the number of entities we monitor from 30 to 80. We’ve also expanded the types of entities subject to anomaly detection. Although centralized exchanges remain in focus, we now also track stable coin issuers, lenders, exchange-traded fund (ETF) products, and decentralized exchanges (DEXs).

#2. Additional risk factors

We’ve also begun tracking anomalies in two additional new risk factors. Previously, our alerts monitored only on-chain balances. After two years of research, we’ve analyzed enough data to conclude that on-chain flows and web traffic are also relevant risk factors for defaults in crypto. More importantly, they can change quickly in periods of volatility.

#3. Enhanced user experience

In addition to improving our coverage, we also improved the user experience. Here’s what’s new:

  • Segmentation between high severity and low severity alerts - high severity alerts include high volume withdrawals by multiple third parties, a Z-score of 4 or higher, and on-chain movements apparently linked to major headline news. Low Severity Alerts include transactions that may be internal, a Z-score less than 4, and single withdrawals traceable to a third party.
  • Dropdown view of multiple risk factors – in addition to balances, users can now view total flows, netflows, and in/out flows. These views, along with balance, will update hourly for 24 hours after an alert, allowing you to track important on-chain data post-alert.

Empowering smarter counterparty risk-taking

By expanding coverage, enhancing variable monitoring, and improving the user interface, we are committed to providing you with the most sophisticated and actionable risk insights in the crypto market. 

Our cryptocurrency risk assessment tools enable firms to: 

  1. Quickly identify potential issues with counterparties 
  2. Make data-driven decisions about exposure levels 
  3. Capitalize on market inefficiencies where actual risk differs from perceived risk 

We encourage you to explore these new features and share your feedback with us. 

Ready to elevate your crypto risk management strategy? Contact Agio today to learn how our Anomaly Alerts system can help protect your investments and identify new opportunities.

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