This past year has been an incredible time of maturation and expansion for decentralized finance. Familiar protocols have seen increased adoption, cementing the foundation on which the whirlwind of new projects have been built. Our community has multiplied in numbers. Countless newcomers are venturing down the DeFi rabbit hole where it is easy to get lost in the numerous technological and economic terms and concepts you must learn. The whole experience can be ultimately overwhelming because not only is DeFi expanding wider, it is also getting deeper.
As DeFi grows larger with more complex and moving parts, it’s important that we have the tools necessary to safely sustain said growth. Each new user, token, feature, project, or protocol adds a variable that users need to take into account when weighing the risks of the protocols that they use. It’s difficult to say the least for users, new and old, to properly assess and compare economic risk across protocols. DeFi Pulse has long been an advocate for user safety and educating users about risk because informed users make informed decisions which results in a healthier ecosystem. And so, we’ve partnered with financial simulation experts at Gauntlet to provide a simpler way to inform users of risk: DeFi Pulse Economic Safety Grade.
DeFi Pulse Economic Safety Grade
The DeFi Pulse Economic Safety Grade, as the name implies, is a 1 to 100 grade that allows users to more easily quantify and compare the economic risks of using on-chain protocols. Grades are created by running simulations utilizing data from centralized and decentralized exchanges combined with on-chain user data to estimate market risks. For a more in-depth explanation of the simulation model, we recommend you read this blog post from Gauntlet.
At launch, safety grades are primarily focused on the risk of insolvency for decentralized protocols or, in other words, the risk to the depositor. Lending protocols are a perfect starting point because they are one of the most popular DeFi applications and have many compounding variables. Gauntlet’s simulations assess four key factors: user behavior, collateral volatility, relative collateral liquidity, protocol parameters. All of these risk factors combined are practically impossible for the average user to evaluate. Our position in the community allows us to take Gauntlet’s sophisticated models and communicate them in a digestible format for a wide audience. The net result of which we hope is a safer DeFi ecosystem full of users mindful of risk.
Safety grades are now available for Aave and Compound on DeFi Pulse. In this initial alpha, these grades are formed by analyzing the historical liquidity and volatility data to find the ‘riskiest collateral’. Then, the risk of the system for users borrowing stablecoins against this collateral is estimated and normalized to create the 1 to 100 grade you see on DeFi Pulse. The higher the grade, the higher the economic safety the protocol.
Our team couldn’t be more excited to finally release these grades and to see their impact on the conversation around economic safety of DeFi protocols. Thanks for reading. If you have any questions, please come chat with us in our Discord or on Twitter.