Lendf.Me, YAM, SUSHI and Opyn: They were all the scene of serious security deficiencies in the DeFi ecosystem, with some devastating consequences for investors.
To minimize the risks for users, Gauntlet has developed a new index
What applies to the crypto market in general, applies to the still untamed DeFi market in particular: a lack of controls and no regulations. Chances of winning and the risk of loss go hand in hand; if you bet on the wrong horse, you will lose out completely.
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To minimize risks for investors, Gauntlet has developed a risk index for DeFi protocols. The index is according to the press release initially limited to lending protocols and is listed on the DeFi data aggregator platform Defipulse under the category „Economic Safety Grades“.
A DeFi Risk Guide
The greatest risk for investors is the illiquidity, i.e. inability to pay, of a protocol. To model this potential risk, Gauntlet brings together several key factors. The criteria mentioned are:
All of these points together contribute significantly to the risk of insolvency. Risks at the smart contract level are not captured in the model. External programmers and corresponding tools are better suited for this.
How risky the general user behavior within a protocol is can be measured by the frequency of liquidations. A critical value thus indicates that the borrowing exceeds the deposit of collateral on average. In the course of this, positions are increasingly being liquidated.
Another measure is the volatility of deposited collateral. If collaterals show a high degree of fluctuation, the risk of insolvency increases as a result. The risk score, however, can screw down if logs prevent users from taking risky positions.