When it comes to comparing DeFi lending platforms, the first thing people tend to focus on is APR – their prospective rate of return for lending and asset.
The reality, however, is that there’s much more to these systems than a rate of return.
Each platform is built differently, by different people, carrying a different amount of risk across several parameters.
These risks are not always clearly visible, and are often hard to interpret for the average user.
They tackle this by quantifying the nuanced risks between platforms, presenting them in an easy-to-interpret way: The DeFi Score.
What metrics does DeFi Score use?
Metrics captured by the DeFi Score can be broken down into three key categories: smart contract risk, financial risk, and other considerations.
1. Smart contract risk
Smart contract risk looks at the safety of the underlying code of a lending platform. This score is determined by how well-tested a protocol is, as well as what kind of systems are in place to continuously eliminate flaws in the smart contract code.
In more concrete terms, this takes into account smart contract auditing, bug bounty programs, and formal verification.
2. Financial risk
Financial risk is all about how the mechanics behind a platform’s financial instruments work.
This takes into account variances in areas such as liquidity, instrument volatility, and collateral requirements.
3. Other considerations
“Other considerations” is a category which is vague by design, to capture risks associated with absolutely any other significant factors.
Currently, this is focused on regulatory and insurance risks, but is open to expanding into any other considerable elements that may arise.
A much-needed rating system
In a budding industry that is onboarding new users on a daily basis, the DeFi Score is a much-needed rating system.
It provides an amazing way to look past marketing tactics, and assess important platform risks at a glance – without the need for technical knowledge.
As a constantly-evolving scoring system, we can expect updates to incorporate several additional risks. New risk assessments being considered are oracles, liquidation policies, and much more.