Probability of Claim

Now that we have the Liability Risk Factor (VRF), we combine this with recent price behaviour from the PRF to produce a new measure, noted beta_t , representing the distribution of Claims against protocol capital (sometimes referred to as the “Virtual Probability of Claim”).

The PRF is more sensitive to shorter term price movements than the VRF, meaning that increasing the weight of the Price Risk Factor will allow the protocol’s premia to respond more quickly to volatility. This comes at the cost of amplifying any “noise” in the underlying price signal (being representative of the underlying price process), which can cause a general decrease in capital efficiency.