The decentralized finance (DeFi) industry has the potential to be more open and reliable than anything Wall Street has ever built because once a protocol works and is battle-tested, it becomes a stable infrastructure for everyone to transact on.
Risk is the next frontier DeFi needs to conquer before the industry as a whole can progress. More than $40 billion of funds were lost over the past year because risk was not assessed properly. At Exponential, we’re solving the biggest problem in DeFi by building the right products to assess the risk of yield opportunities and creating a reliable investment platform for DeFi.
DeFi’s open nature is its greatest strength but also its greatest vulnerability. Anyone can release code on blockchains, and many projects grow before they are fully vetted. For example, Terra’s UST stablecoin grew tremendously before people looked into its architecture.
This exposes investors to countless risks:
- Rug pulls (a smart contract is changed after you’ve already invested)
- Bugs in smart contracts (code isn’t written correctly)
- Scams (contracts with backdoors to steal your money)
- Hacks (hackers break into systems and steal funds)
Identifying and keeping track of all these risks is near impossible, even for savvy DeFi investors. This puts traditional finance (TradFi) at an advantage; investors have decades of regulation to minimize risk and history to reference. In DeFi, code is law. If the code has an anomaly, investors can lose their funds with no recourse. If counterparty risk impacts a transaction, it will be exploited. DeFi is a harsher environment that leaves only the fittest protocols alive.
Exponential has tackled DeFi risk head-on. We’ve built products that make it easy for investors to assess risk, including Rate My Wallet, which instantly analyzes the risk of DeFi portfolios, and Exponential Risk Ratings, which distill thousands of risk vectors into a simple letter grade. To date, we’ve identified over $3 billion of funds still invested in high-risk projects.
Our approach simplifies DeFi investing while still being comprehensive and includes:
- Holistic risk assessment framework
- We’ve developed a holistic framework that assesses all risks we can anticipate, imagine, or have seen happen in the past. For the first time, thousands of risk vectors are analyzed simultaneously and distilled into a summary that learns over time. Our Risk Ratings take into account code quality, asset strength, and single points of failure that can be present at the asset, protocol, or blockchain level.
- Given DeFi’s composability, assets can be built on top of one another like money legos, creating compounding risk. Our comprehensive system identifies these risk vectors for pools, contracts, and assets.
- Exponential’s DeFi Graph maps relationships across assets, protocols, and chains to identify potential knock-off, interdependency, and trigger-down risks. For example, a pool may depend on an asset that depends on a protocol. We track this web of dependencies to assess an investment’s risk properly.
Risk assessment is one of the most important things you can do before investing in DeFi, and our risk ratings allow investors to assess risk quickly and identify opportunities that match their investment criteria.
This is DeFi’s moment to shine. DeFi is not plagued by the same issues that have caused Wall Street meltdowns. There is no counterparty risk, discrimination against the unbanked, or middlemen with their own interests. DeFi and blockchain technology lays the foundation for a financial system that is stronger, more reliable, and doesn’t depend on obsolete tools to function. Our role at Exponential is to simplify DeFi investing so anyone can access high-yield opportunities – not just banks. This will usher in a new era of financial freedom for all.