Measuring Risk on 2Pi DeFi Strategies
The market has been hit hard in recent weeks. In this context, it is an excellent time to remember that exchanges are down, not decentralised finance (DeFi) protocols.
To continue to provide transparency to the DeFi ecosystem, 2Pi Network, an aggregator service for Fintech companies, using automation to allow them to maximize profits from yield farming, launched two novel verticals that users can use to track infrastructure protocol smart contracts.
First, we have launched an integration with DeFi Llama, a DeFi TVL aggregator committed to providing accurate data without ads or sponsored content and transparency. The dashboard is now available and can be checked here.
Secondly, we are proud to officially announce our risk matrix. It is a matrix that gathers six metrics that can be used from now on by all our partners to analyze our deployed strategies. To view the risk matrix for each protocol, please click on this link and click on each strategy to display the corresponding metrics. You can also access our Risk evaluation Docs here.
Below is the complete detail of the verticals that will be analyzed in the official 2Pi Network risk matrix. We hope this is a new step towards decentralization and transparency in the crypto ecosystem.
The TVL (total value locked) impact is a figure between 1 and 5 as well, where 1 is the lowest impact labeled “low” (above 50MM), and 5 is the highest impact in TVL less than 100k. This table measures how to allocate to new riskier strategies without having a catastrophic event in case of a hack or issue. The TVL is measured in USD and grows dynamically based on strategies allocations on-chain.
At 2Pi keep track of the TVL and risk score to make fund allocation decisions and mitigations if a strategy group has fallen into the “red” high-risk zone.
The testing score is a metric of how much of the codebase for the strategy has been tested.
Higher coverage means the developers and strategists took time to try most of the operations of the strategy in a unit test or fork environment, while a less tested strategy entails more risk since we know less about what is expected from the code.
We leverage the deep processes implemented by DeFi Safety, and we make a different distinction. DeFi Safety is the #1 source for technical data in DeFi and 2Pi uses their safety percentage to know if a strategy is sufficiently secure to deploy.
Auditing is when an audit firm or an external security researcher reviews the code for potential vulnerabilities and presents a report for mitigation. They usually take longer than an internal security review and are not immediately available, given the demand for audits in the space, so most strategies are sent to production with no audits (thus high-risk score) to keep their TVL limited.
The risk score helps us prioritise which strategies should be audited based on impact and other scoring dimensions.
5.Strategy Complexity Score
In this matrix, we look at whether the strategy comprises leveraged positions with different assets, how asset groups work, where there is auto compounding, and more.
The idea is to closely understand how this protocol is built and follow its operation to prevent all risks.
In longevity, we prioritise how long the strategy has been running live on 2Pi. We know that a week is a year in the DeFi space, but time is still essential. We precisely check if the code is one week old to eight months old.