Defi have taken the world of crypto by storm of late and many veteran and new crypto enthusiast have jumped on board of the train. Several leading mass media personalities such as Elon Musk have come out declaring support for cryptocurrency, even central banks have plans to jump on board.
Many new and innovative Defi apps and protocols have been launched in the past year. In particular, liquidity farming and/or staking services offering high yields and governance token rewards. Simply put, investors deposit cryptocurrencies to provide liquidity to currency pairs or for loan purposes to other traders in exchange for payouts.
A lot of money have been invested in these services, the TVL (Total Value Locked) in some of these projects are simply eye-watering, including Curve Finance ($6.3 Billion), Uniswap ($6.4 Billion), Compound Finance ($9.5 Billion), PancakeSwap ($10 billion).
With these, there are also cases of failures such as hacking incidences that cost investors dearly. Some of these losses includes Uranium Finance ($50 million), EasyFi ($50 million) and Alpha Finance ($37.5 million).
While it may be somewhat less of a worry when dealing with more established services, there are continuously new and interesting services and attractive returns that catches our attention. So how do we decide if these are solid enough to invest?
I would like to share some of my personal practices which I apply to try to minimize unnecessary incidents from happening to my crypto investments.
1. Look for certified audits
Check that the protocol and smart contracts have successfully undergone audits. Some of the more well-known audit certification providers include Trail of Bits, OpenZeppelin, Certik and Haechi. I also want to see that all audit issues that have been flagged out are addressed, even if it is a small issue.
2. Look at the team
For some protocols and services, their creators and teams remain anonymous, that is the part of the nature of the world of cryptocurrency. However, some of the projects do have names attached to them. I will always look if the protocol or service provides any information or background on who are their founders and team, along with any track record.
3. Look at the backers
You may be able to find information on some of the backers and VC that are behind the service. For example, Uniswap have raised over $11 million from Paradigm and Andreessen Horowitz. Having well-known VCs or backers definitely will make the project more attractive for me.
4. Look at the roadmaps and social media
Roadmaps may indicate any upcoming protocol upgrades or smart contract enhancements to further secure them. Social media (such as Medium, Discord or Telegram) is also a good source to monitor and be updated on the team’s plan.
While there is no sure way of avoiding cases of hacking and dishonesty, there are certainly some measures we can take to try reduce the risk of such occurrence happening to us. Be well and prosper!