Exposure vs Allocation
Exposure and allocation are related but distinct concepts in RAX Protocol.
Understanding the difference between them is essential for interpreting risk correctly and making disciplined capital decisions.
What Is Allocation
Allocation describes how capital is distributed.
It answers the question:
Where is capital currently deployed?
Allocation is typically expressed as percentages or absolute amounts across:
Assets
Protocols
Strategies
Chains
Examples of allocation include:
30 percent in stablecoin lending
25 percent in liquidity pools
20 percent in derivatives
25 percent held as idle capital
Allocation is descriptive. It shows positioning, not vulnerability.
What Is Exposure
Exposure describes dependency and sensitivity to risk factors.
It answers the question:
What risks does this capital depend on?
Exposure reflects how strongly a portfolio is affected by:
A specific protocol or smart contract
A single chain or infrastructure layer
A narrow set of assets
Shared liquidity sources
Correlated market movements
Two portfolios with identical allocations can have very different exposures.
Why Allocation Alone Is Insufficient
Allocation alone can create a false sense of diversification.
For example:
Capital spread across multiple pools may still depend on the same underlying protocol
Positions on different chains may rely on the same bridge or oracle
Different strategies may be exposed to the same volatility or liquidity conditions
In these cases, allocation appears diversified, while exposure remains concentrated.
How RAX Measures Exposure
RAX evaluates exposure by analyzing dependency structures across the system.
This includes:
Protocol-level dependency
Chain concentration
Asset class concentration
Liquidity source overlap
Correlation under stress conditions
Exposure analysis focuses on identifying hidden concentration and structural risk rather than surface-level distribution.
Exposure and Risk Score
Exposure is a key input into the Risk Score.
High exposure to a single protocol, chain, or risk factor can increase the Risk Score even if allocation appears balanced.
Reducing exposure often lowers risk more effectively than simply reallocating capital across similar strategies.
Practical Examples
A portfolio may:
Allocate capital across five liquidity pools
Yet remain highly exposed to a single protocol or chain
Another portfolio may:
Allocate capital across fewer positions
But achieve lower exposure through diversified dependencies
In these cases, exposure provides a more accurate picture of risk than allocation alone.
How RAX Uses Exposure Analysis
Exposure analysis is used to:
Identify concentration risk
Detect protocol or chain dependencies
Inform allocation constraints
Generate rebalancing suggestions
Support stress testing and simulations
The Allocation Engine uses exposure signals to guide recommendations and enforce guardrails.
Managing Exposure Effectively
Effective exposure management involves:
Monitoring dependency concentration over time
Avoiding hidden correlations
Applying limits to protocol and chain exposure
Combining exposure analysis with simulations
Treating exposure reduction as a first-class risk control
Summary
Allocation describes where capital is placed.
Exposure describes what that capital depends on.
RAX separates these concepts to provide a clearer and more accurate understanding of risk, enabling users to move beyond surface-level diversification toward structural resilience.
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