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As the decentralized finance (DeFi) market has continued to evolve and grow, it has witnessed a substantial rise in the number of novel yield-bearing instruments permeating this space. To elaborate, the landscape currently spans more than a thousand blockchains alongside a myriad of protocols such as decentralized exchanges (DEX), lending platforms, cross-chain bridges, and much more, each offering their own unique earning opportunities.
However, as enticing as these opportunities may be, they do come with their fair share of risks — from the security of smart contracts to the overall design of the protocols themselves, the DeFi sector is fraught with potential pitfalls that can jeopardize any investors' assets.
To put things into monetary perspective, all through 2023, a total of $1.6 billion was lost as a result of DeFi-related hacks across 247 incidents. Similarly, fraud-related issues accounted for $103 million spread through 110 incidents.
Unveiling Risk with Rivo's Safety Score Assessment
To help minimize the occurrence of the issues highlighted above, Rivo, a platform combining a DeFi Yield marketplace with a smart-contract wallet, has devised a generalized safety assessment score framework that can evaluate the risks associated with any DeFi strategy — such as vaults, lending protocols, etc — by focusing on four principal components, namely, simplicity, longevity, and smart contract security.
Simplicity
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5/5: A score of 5 indicates that the strategy is exceptionally easy to comprehend and manage. Such strategies typically do not involve leverage, lack publicly accessible methods, and are highly unlikely to result in losses, making them the most user-friendly and secure.
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4/5: A score of 4 suggests that the strategy is still relatively simple and straightforward to migrate or unwind, albeit with a slight increase in complexity compared to the highest score.
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3/5: At a mid-range score of 3, the strategy begins to introduce elements that could potentially lead to losses, such as withdrawal fees or the necessity for detailed queue management to avoid financial setbacks.
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2/5: Strategies that employ leverage or incur debt receive a score of 2, making them significantly more challenging to unwind and thereby increasing the risk profile.
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1/5: Finally, a score of 1 is given to the most complex strategies, which not only use leverage or debt but are also characterized by their difficulty to unwind, representing the highest level of complexity and risk within the spectrum.
Longevity
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5/5: A top score of five signifies that the strategy has been operational for over eight months without encountering critical issues or requiring any changes to its code base, highlighting its reliability and consistency.
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4/5: Strategies with a longevity score of 4 have been active for more than four months, suggesting they have surpassed the initial phases of deployment and are showing signs of stability and effective performance.
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3/5: A score of three is attributed to strategies that have been in operation between 1 and 4 months. This duration indicates that while the protocol has been live enough to demonstrate functional viability, it is still within a relatively early stage of its lifecycle, potentially undergoing further observations and tests for long-term sustainability.
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2/5: Strategies receiving a score of two have been functional, and their performance/stability is yet to be fully assessed, presenting a higher degree of uncertainty compared to more established protocols.
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1/5: Lastly, the lowest score of one is reserved for strategies that have been live for less than two weeks. This short span post-launch indicates the highest level of uncertainty, as they have had minimal time to prove their operational stability, security, and effectiveness within the DeFi ecosystem.
Volatility
The volatility rating is tied to the market capitalization of assets utilized within a particular strategy. It is based on the assumption that assets with lower market capitalization are easier to move, leading to more extreme price fluctuations. Every strategy receives a volatility score reflecting the riskiest utilized asset, e.g. if a strategy provides liquidity for ETH and a <$100M market cap asset, its volatility score equals 1/5.
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5/5: Assets utilized in the strategy are USD-pegged stablecoins with little to no volatility.
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4/5: The strategy involves BTC, ETH, and assets ranking in the top 20 by market cap according to Coingecko or CoinMarketCap, as well as their respective wrappers (including liquid staking tokens).
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3/5: The strategy involves assets or their respective wrappers consistently ranking among the top 100 coins by market capitalization.
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2/5: The strategy utilizes assets outside of the top 100.
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1/5: Strategy involves highly volatile assets with market capitalization <$100M.
Protocol Security
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5/5: A top score of five is awarded to so-called "blue chip" protocols renowned for their robust security records, such as Maker and Uniswap, which not only meet but surpass the established safety criteria.
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4/5: Protocols that achieve a score of four have undergone rigorous due diligence, with their contracts audited by at least two reputable firms, demonstrating a high commitment to security through robust multi-signature setups or immutability and offering significant bug bounty programs.
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3/5: A score of three indicates protocols that have been audited by at least one reputable audit firm and maintain essential security features, showing a solid security foundation.
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2/5: Protocols with a score of two have completed basic due diligence with audited contracts and some form of multi-signature requirement, yet they present a moderate level of security due to lower thresholds for multi-signature operations and the absence of bug bounty programs.
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1/5: Finally, a score of one is assigned to strategies that utilize protocols with little to no due diligence, feature new, unaudited contracts, and are controlled by externally owned accounts, representing the highest risk due to a lack of established security measures.
DeFi Strategies on Rivo and Their Scores
Using the aforementioned criterion, some of Rivo’s DeFi strategies can be evaluated. Key examples include:
Benqi sAVAX
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Simplicity: 4/5 —The strategy employs a leveraged yield farming approach, introducing little complexity in its operations.
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Longevity: 5/5 — Receiving a top score, the strategy has proven its reliability and stability, having been operational for an extended period without any critical issues.
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Protocol Safety: 5/5 — The underlying Benqi protocol has undergone comprehensive audits by reputable firms, showcasing its robust security structure.
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Volatility: 4/5 — Since the strategy involves AVAX, a digital currency with a sizable market capitalization, it exhibits moderate to low volatility.
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Strategy Score — 90/100
Link: https://app.rivo.xyz/asset/0xc8cEeA18c2E168C6e767422c8d144c55545D23e9
*The overall strategy score is formed by summing the simplicity, durability, security, and volatility scores, with each point weighted by 5. The maximum score is 100, and the minimum is 20.
Cian wstETH
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Simplicity: 2/5 — This strategy employs leverage or debt, adding significant complexity to its unwinding process and management.
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Longevity: 5/5 — Achieving a top score, the strategy has demonstrated its reliability and stability over an extended period, running for over eight months without any critical issues.
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Protocol Safety: 4/5 — The protocol has undergone multiple audits by reputable firms, though its security credentials are not at the highest level.
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Volatility: 4/5 — The strategy involves staked ETH, a top cryptocurrency by market capitalization, resulting in minimal volatility.
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Strategy Score — 75/100
Link: https://app.rivo.xyz/asset/0xE946Dd7d03F6F5C440F68c84808Ca88d26475FC5
Navigating the Inevitable
Despite the advancements made in risk assessment methodologies like Rivo's safety score system, it is crucial to acknowledge that certain inherent risks in DeFi cannot be entirely eliminated. The decentralized nature of these platforms, while presenting unprecedented opportunities for yield generation, also opens up avenues for unforeseen vulnerabilities. Investors must tread carefully, armed with as much knowledge and understanding of these risks as possible.
In closing, the allure of DeFi for cryptographic asset holders is undeniable, offering paths to financial growth hitherto unimaginable. Yet, as we venture further into this new frontier, the importance of vigilance and informed decision-making cannot be overstated. Rivo's safety score assessment represents a significant step forward in this regard but should be treated as a singular tool in any investor's arsenal.