> For the complete documentation index, see [llms.txt](https://riskguard-1.gitbook.io/riskguard-docs/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://riskguard-1.gitbook.io/riskguard-docs/whitepaper/04-risk-scoring.md).

# 4. The Risk Scoring Engine

> A risk score is only useful if the investor understands what it measures and trusts how it was calculated.

RiskGuard scores every detected position across four independent dimensions, each capturing a distinct category of risk. The dimensions are weighted and combined into a single position score from 0 to 100, where higher indicates safer. Position scores then roll up into a consolidated portfolio score that additionally accounts for concentration.

## The four dimensions

| Dimension          | Weight | What it measures                                                                                                                |
| ------------------ | ------ | ------------------------------------------------------------------------------------------------------------------------------- |
| **Smart Contract** | 30%    | Contract-level security, audit status, and known vulnerability signals for the protocol holding the position.                   |
| **Liquidity**      | 25%    | Depth of liquidity backing the position and the protocol's total value locked, indicating how easily a position can be exited.  |
| **Centralization** | 25%    | Degree of admin-key control and governance centralization that could be used to alter or freeze the position.                   |
| **Market**         | 20%    | The protocol's standing and the market conditions of the underlying assets, including volatility and impermanent-loss exposure. |

The smart-contract dimension draws on dedicated security-data providers; the liquidity and market dimensions draw on protocol-level TVL and ranking data; and the centralization dimension incorporates admin-key analysis. Established, audited protocols are recognized as such and scored accordingly.

## Score bands

| Score  | Rating        |
| ------ | ------------- |
| 80–100 | Low risk      |
| 50–79  | Moderate risk |
| 0–49   | High risk     |

## Portfolio-level scoring and concentration

Individual position scores do not tell the whole story. A portfolio with a single high-scoring position is still fragile because it is undiversified. RiskGuard therefore computes a concentration measure using the Herfindahl-Hirschman Index (HHI), a standard economic measure of concentration, applied to the distribution of capital across positions and protocols.

A well-diversified portfolio receives a diversification benefit; a concentrated one is penalized. An additional benefit is applied when a portfolio spans multiple chains, reflecting reduced single-ecosystem risk. The result is a portfolio score that reflects not just the quality of individual positions but the structural resilience of the whole.

{% hint style="info" %}
**Why transparency matters.** Unlike opaque "risk ratings," RiskGuard's methodology is explainable. Each dimension maps to a clear, auditable data source, and a user can see which dimension is dragging a score down. This transparency is what turns a number into a decision an investor can act on with confidence.
{% endhint %}


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