At Exponential, our mission is to make decentralized finance (DeFi) accessible, transparent, and secure for all. A core part of this mission is curating a list of investable pools that meet our rigorous standards for risk, compliance, and performance. This process is designed to give users peace of mind while ensuring access to the most attractive yield opportunities across DeFi.
Here’s a behind-the-scenes look at how we analyze, evaluate, and list new investable pools.
Step 1: Rigorous risk analysis
Our risk framework is at the heart of the listing process. Every pool undergoes a detailed risk assessment across multiple dimensions to identify potential vulnerabilities and ensure it meets our high standards.
- Protocol Risk
- Smart contract security: Have the contracts been audited by reputable firms? Has there been any hacks?
- Governance: Is the protocol decentralized? Are key decisions controlled by an EOA, multisig wallet or a broader DAO?
- Design: Are there any reflexivity or death spiral risks? What is the protocol’s core “job”? E.g. Lending protocols are overall riskier than staking protocols
- Asset Risk
- Asset backing: For pegged tokens, are they overcollateralized or fully backed?
- Peg stability: How stable are the assets in the pool?
- Counterparty Risk: Are any assets reliant on centralized entities?
- Chain Risk
- Maturity: How long has the network been live?
- Centralization: How many validators help secure the network? Is the chain vulnerable to attacks (e.g., 51% attacks)?
- Congestion: Does high activity compromise transaction speeds or increase costs?
- Pool Risk
- Impermanent loss: Is the pool market making between two pegged assets, correlated assets or uncorrelated assets?
- Slashing risk: Do any of the assets have Proof-of-Stake (PoS) slashing risk?
- Yield strategy: How complex is the yield optimization strategy? Does it involve simple rebalancing or more complex off-chain computations?
- Collateralization: What is the quality of asset backing for pegged tokens? Is it backed by pristine collateral or more long-tail assets?
Step 2: Legal and compliance review
In addition to risk assessment, legal compliance is paramount. Our team ensures that listing a pool aligns with regulatory requirements and protects our users.
- Jurisdictional considerations: Are there restrictions on who can participate in the pool, and how are they enforced?
- Howey test: Does the pool or its underlying tokens meet the criteria of the Howey Test for classification as a security? Is there an investment of money in a common enterprise with profits expected from the efforts of others?
By performing these checks, we mitigate the risk of regulatory issues that could impact users’ investments.
Step 3: Evaluating attractiveness
Once a pool passes the risk and legal reviews, we evaluate its potential for delivering attractive returns to our users.
- Yield attractiveness
- APY consistency: Does the pool offer stable and competitive yields compared to peers?
- Reward structure: Does the pool pay rewards? If so, how sustainable are these rewards?
- TVL (Total Value Locked)
High TVL is often a sign of user confidence and pool stability. We list pools where the core pool has at least $1M in TVL.
- Market trends
We monitor DeFi trends to identify pools that align with emerging themes, such as Layer 2 scaling solutions, Real World Assets (RWA), or BTC-based DeFi opportunities.
- One-way doors
We typically avoid pools that function as one-way doors (e.g., yCRV, cvxCRV), where exiting the pool requires relying on secondary markets. These pools often lead to negative price impacts for users, as the pool tokens frequently trade at a discount to their underlying assets, making it difficult to achieve a 1:1 redemption value.
Step 4: Testing
We test each pool to ensure its advertised yield is legitimate and that users can easily enter and exit without issues. This includes checking for sufficient on-chain liquidity to avoid problems when withdrawing funds. We prioritize pools that offer instant withdrawals with no restrictions or delays. Additionally, we test for slippage (price changes during transactions) to ensure there are enough trading venues to smoothly exchange assets without unexpected costs.
Step 5: Final approval and listing
Once a pool has passed all reviews, it goes through a final approval process. Our internal committee evaluates all findings, ensuring the pool aligns with Exponential’s commitment to user safety and value.
After approval, the pool is listed on our platform, complete with a detailed profile that includes:
- Risk ratings: A breakdown of protocol, asset, chain and pool risks.
- Performance metrics: Historical yield trends, TVL, and other key data points.
- Transparency reports: Insights into how the pool operates and what users can expect.
Ongoing monitoring
Our work doesn’t end once a pool is listed. We continuously monitor all investable pools to ensure they maintain their standards. This includes tracking:
- Smart contract updates or new audits.
- Changes in governance or access controls.
- Yield fluctuations and shifts in market conditions.
If a pool no longer meets our criteria, we may delist it to protect our users.
Why our process matters
DeFi offers incredible opportunities, but it’s not without risks. At Exponential, we take the guesswork out of DeFi investing by listing only the pools that meet our rigorous standards for safety, compliance, and performance.
By prioritizing thorough research and transparency, we empower users to confidently navigate the world of DeFi to achieve their financial goals.
Ready to explore our curated pools? Check out the latest opportunities on Exponential.fi.