Due to the rising development of projects related to the field of decentralized finance (Defi), the evaluation and identification of opportunities is of particular importance. There are different ways to invest in this area and in terms of risks in the capital markets, it has gotten a relatively higher security and stability in comparison to trading methods.
Although, it is important to note that in order to save capital and take advantage of these opportunities, one must have a good understanding of the cryptocurrency market and ethereum blockchain. As a result, by using the criteria mentioned in this article, evaluating properly of projects and platforms in Defi could be noticeably a game changer.
Audit (reviewing of smart contracts software code)
In the beginning, to start working on any Defi platform, it is recommended to ensure having a technical review of smart contracts through the performed audits.
Therefore, it is better to use platforms that have at least one audit with an official report and have made it available to the public. Also, if a platform announces an update to be done in its smart contract, be sure to take precautions until it is re-audited.
Auditing smart contracts in the field of Defi
Software audit is the process by which an individual or team examines the codes of a software. The purpose of this investigation is to detect any bugs, security breaches or breaches related to programming conventions before using the software.
Smart contract auditing plays an important role in assessing the technical risks associated with dApps (decentralized applications), but because they are a relatively “new form of code”, the standard for smart contract auditing is in its early stage right now.
Companies such as Chain Security, Trail of Bits and Certik now offer smart contract audits and set specific standards for how to perform an audit. For this reason, as long as the standards are not universal, customers must trust the credibility of these companies to evaluate the quality of their audits.
In the following, in order to review the relevant content, according to the views that exist by experts in this field, we introduce the following topics:
What exactly are smart contract audits?
It is an independent review that evaluates the security and accuracy of the codes and has its benefits. Initially, users find an independent opinion on the behavior of these contracts that can alert them to potential threats.
Secondly, Project managers can get a good feedback and take steps to reduce security risks. Likewise, developers use important security advice and related reports. But not all audits are the same. The value of an audit depends on the technology being used and the expertise of the audit team.
Are there any degrees of approval in audits?
A limited audit affects its level of reliability. Usually, before starting an audit, the client sets the desired limits in the code for review, which may not include some parameters in the audit due to the lack of budget and time. As a result, the parameters and access level in an audit report must be specified.
For example, Trail of Bits always mention the following in its audit reports:
- Executive Summary: This section contains a brief overview of what has been done and the next recommended steps. It should be specified how much work is foreseen for the project in order to eliminate the identified risks.
- Project Dashboard: A table prepared to make it easier to understand, a summary of the level of efforts in auditing the source code and the hints found. In fact, they provide a kind of visual index of the audit.
- Engagement Goals: In this section, the desired domain in the review of a project is presented. Have we sought to identify the risks involved?
- Coverage: this section is about our ability to achieve the desired goals despite the limitations of the project, Such as Information on specific contracts and techniques used in an audit.
What common problems in smart contracts make them vulnerable?
- Incorrect access: Granting access to unauthorized people or not giving access to authorized ones.
- The execution command of program does not work.
- Improper filter on invalid user inputs.
- Logical defects in smart contract codes.
- Numerical errors: Errors related to rounding numbers and incorrect calculations.
- Relevant project claims to have done audit: The best possible scenario for the project is to publish its audit report. The report should contain the audit method, findings and how to deal with related issues. This allows users to check the validity of the audit and ensure that the audit is done in a professional way.
Example of the day
Paid Network Hack: The recent hack of the paid network project is one of the most important relevant experiences in this field, especially for people who are active in Defi. In this example, even with having done an audit, they were severely hacked due to poor key management of wallet which had a negative impact on their token and the project itself. So the hacker could access to the wallet attached by smart contract. Then minted so many additional paid tokens and sold them on the market.
Fortunately, due to the good record of project members in this field, they quickly took appropriate security measures such as eliminating liquidity pools on other platform and making consultation with security platforms. They also communicate directly with their users by publishing official videos for the next steps ahead. An action that not every project could handle this way.
Pools Data (liquidity Pools information)
Although many platforms use Liquidity Mining to get liquidity, it is important to review some key data such as APY (annual percentage yield) rate, total value locked (TVL) and duration of platform activity.
High APY interest rates on liquidity pools typically have a higher risk of investment because of the volatility of the assets in which you invest.
However, if total value locked in a pool is high enough, the security is relatively higher because more people have invested in them, especially when the supposed pool has been active in a long period of time.
- Liquidity Pools usually consists of two or more assets, such as USDT and Ethereum.
- This liquidity is provided by asset owners.
- An investor can sell one of the relevant assets and acquire other asset in return. For example, by selling Ethereum, you receive USDT.
- Investors pay a fee when exchanging assets in the Liquidity Pool.
- Liquidity suppliers share the fees paid by investors.
- Many platforms offer their tokens as a reward to encourage investors for providing liquidity.
Liquidity Pool & Yield Farming
When a user deposits tokens into a Liquidity Pool, the platform grants LP tokens based on the value of the liquidity provided by the user. In this way, the relevant exchange knows how much value the user has deposited in the pool.
In addition, when the user decides to remove tokens from a pool and remove liquidity, the LP tokens will be burned and the user’s original tokens are returned besides the platform reward.
But when you have LP tokens, you can use Yield Farming to get more profit. In this case, different products are somehow connected in the Defi ecosystem. Users can interact with LP tokens like other tokens during the smart contract period. To maximize efficiency, the user can deposit LP tokens in another platform to achieve greater yield rates. A user can repeat this action with any platform and any number of LP tokens, if the relevant platform accepts the desired tokens.
In reviewing each platform, be sure to check the Twitter account of the project and get information about their recent activities and the number of followers. Also, to get the latest news, including cooperation agreements between different projects, Twitter social network is a priority.
Many projects in Defi try to build their user community on the Discord platform. In this website, users can communicate and benefit from each other’s opinions. They can also be in touch with people who are in charge of the project, if necessary, and use their solutions.
Also, topics related to educating different sections of the project, accessing to wallets and communication with active members in the community are the most important benefits of this social network.
Currently, all projects related to the field of Defi post educational articles and introductions in medium platform, and in a way, this platform has become one of the most important resources for formal access to the goals, roadmap and educational subjects of the projects.
Resume of project managers & Co founders
Projects that display the names and images of their managers publicly on the site are more secure. But it is necessary to mention that you must “check the information and updates of the relevant people on Twitter, LinkedIn and match their photos if available.
One of the most important parameters for investing or using a platform is to check creative values. Because successful projects in this field use existing ideas and add their own innovations into it. The followings are clear examples of value creation in this area.
Uniswap and Sushiswap: At the beginning of Defi, the Uniswap platform, which is a kind of decentralized exchange (Dex), took advantage of the idea of liquidity platforms and AMM (Automated Money Maker) and was the first choice of active users in Defi to Buy coins and exchange various tokens.
After a while, the fork of this platform, Sushiswap, was introduced, which many active people in this field may not have welcomed the method and type of their inherent competition, but this platform, by combining Farming and Swap topics, has now become one of the most prominent decentralized exchanges.
Lending platforms: In this regard, it would be better to start with the Maker platform. With the idea of creating a Decentralized Stablecoin called Dai, this platform has been able to capture about 17% of the Defi market cap in January 2021. The interesting thing about this platform is that their stablecoin (Dai) is backed by ethereum.
So it has been able to attract users’ capital for providing them to borrowers. The idea and mechanism of the Maker platform is one of the most special innovations in the field of Defi. In addition, we can give an example of the Aave platform, which has been able to become a prominent platform in this field by making new changes. Aave provides its Aave tokens to users in return for receiving user assets.
For example, by depositing Link tokens to the platform, you will receive a corresponding amount of Aave Link tokens that can be used on other platforms. Another innovation of this platform is the FlashLoan, in which you can actually receive a loan from the platform in a transaction, and moments later, when the same transaction is completed, you can repay the loan.
Flashloans can be used in arbitrage opportunities in exchanges as well as to reduce the gas fees of the ethereum network by performing several operations in one transaction.
Leverage Trading and dydx: The dydx platform, by combining the idea of Lending and Leverage Trading in its context, has been able to provide a completely “suitable” approach for traders in the field of Defi in a completely decentralized way.
Practical Tools & Risk Management in Defi
Explore data in the ethereum blockchain with Etherscan. This website, which is considered the ethereum Blockchain Explorer, is a useful tool for checking transactions and the status of the ethereum Blockchain. It can be used to search and check any trade and registered transaction in blockchain. Most blockchains also have their own explorer.
For this purpose, it is recommended that you enter your ethereum wallet address in Etherscan and check your wallet transactions. Check the destination addresses of what transactions you have made in recent days, and if there are any suspicious cases, such as any unusual activity, take action to resolve them if possible.
Use Coingecko to access the latest price changes and up-to-date information on coins. A very useful tool for accessing official and reference information of various coins, price changes and market capacity, which is very practical in the field of Defi. You can also use Coingecko to find out about the latest liquidity and Farming Pools, along with the up-to-date APY, the number of audits associated with that platform, and the amount of total value locked.
By using LiquidityFolio platform, you could access to the most comprehensive information on liquidity pools in different blockchains. In addition, by entering your wallet address in this platform, you can ensure your presence in various pools.
Zapper platform tries to facilitate portfolio management in Defi. A portfolio management tool in Defi that tries to provide services on Defi platforms to view all assets in the dashboard. Also, this platform tries to make it easy by providing relatively the most important liquidity and Farm pools, with appropriate filters.
Use the Zerion platform to perform all important operations in Defi through a good user interface. It is a practical tool for managing all important operations in the field of Defi. By using this platform, you can track your portfolio in a graphical view that is really practical and comprehensive in displaying portfolio assets. It does even monitor NFT assets. One of the most important advantages of this platform is having a good user interface.
The platform also consists of various sections such as Exchange, Borrow and the search bar for important liquidity pools and Yield Farming platforms. Other advantage of these kind of platforms are their cooperation agreements with decentralized exchanges and the ease of making transactions.
For example, in the first 1inch Airdrop, the 1Inch platform, which airdropped 600 tokens to its users, faced some delay issues in the early days due to high traffic from users to Claim and request to transfer tokens to their wallet. But users who checked the 1Inch Twitter account and found out about the platform’s partnership with Zerion were able to easily transfer Airdrop tokens to their wallet via Zerion.
The Yield Farming Tools platform provides important tools and resources related to Defi. A practical tool consisting of various parts such as calculating the Impermanent Loss, the amount of Collateral and …. One of the advantages of this platform is getting to know the most important up-to-date topics in the field of Defi, which is available in the Resource section.
Also in the Tools section, you could use the Impermanent Loss calculator and get the latest ethereum gas Fees. This platform has a search bar for liquidity pools, with the difference that it offers very good and distinctive filters. Filters such as APY rates, smart contract risk and Impermanent Loss, various platforms offering defi, Collateral type and tokens in Pools and rewards for participating in various Pools that all are very useful.
Transact via bot telegram @GaspriceTrackerBot, set the alarm at appropriate times. This bot is used to provide up-to-date information on transaction fees in ethereum Blockchain. This bot also has the ability to set alerts when the gas fee is low.
Before making any transaction on ethereum network, use the Gasnow website to select the best gas fee according to the time priority that is suitable for you. This website, which is supported by one of the most important ethereum blockchain mining pools (Sparkpool), offers the most accurate amount of gas fees in four different time modes.
Another advantage of this website is providing a practical graph of the amount of gas fee per number of submitted transactions, which can be useful to predict the load of ethereum network.
Use Defiyield.info to find out the risk level of smart contracts and assistant tools. Undoubtedly, it is one of the most important Defi management platforms. This platform is capable of searching for liquidity pools and Vaults of various platforms for investment. One of the most important features of Defiyield is showing the performed audits and the risk degree of smart contracts in the field of Defi.
It also offers the Impermanent Loss calculator, which has the most accurate and best user interface of this type. Other benefits of this platform includes Cancelling Ethereum Transactions and Gas Cost Tracker.
Use lending management tools with Defisaver platform. It is one of the most important tools in the field of lending & borrowing. Thanks to this platform, we can automatically protect our Collateral from loans received from different platforms with peace of mind.
Also, by performing only one transaction in general, we can repay our loan, which also saves on transaction fees. Another very useful feature of this platform is converting collaterals to each other or transferring your positions from one platform to another with just one transaction. Also, by launching Smart wallet on this platform, a CDP of Maker is automatically created for the user.
After creating a smart wallet, you can also use the Loan Shifter feature. In short, DefiSaver significantly reduces transaction costs in the Lending and Borrowing issues and makes managing assets and collateral much easier.
Use the Instadapp platform to take advantage of the new Defi services in lending. This platform has also been very effective in the field of lending and implementation of various strategies. Instadapp is known for its innovative service approach in this area.
For example, in the latest update of its services, the use of Uniswap LP tokens in leveraging and collateral strategies is very interesting and innovative. With this new method, professional Defi users have been able to increase their income through the fees of AMM platforms.
By using Furucombo, Perform combined transactions in a single one. The platform is designed for users familiar with Defi that seeks to facilitate complex hybrid transactions. With Furucombo, combination of complex Defi protocols strategies can be executed in a single transaction. Also, in its Explore section, you can get ideas from different sample combinations and use them to perform your transactions optimally.
By using dappradar, you could explore and have a quick and categorized access to decentralized applications (dApps). With the development of numerous decentralized applications in different blockchains, categorized access and exploration based on practical filters are of particular importance.
This platform is a kind of portal between blockchain developers and blockchain users. Other features of this platform include providing statistical reports, portfolio management, and up-to-date information on NFT markets.
Bsc in chemical engineering. Farnoush is a blockchain enthusiastic & freelance researcher who believes Finance services could be the most important application on blockchain. He recently became hooked on Defi (decentralized finance) & NFTs.
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