Crypto investors now have a new reference point to evaluate the decentralized finance projects; this is possible because of a new risk indicator by the DeFi Pulse.
On Tuesday, DeFi Pulse has announced the release of the DeFi Pulse Economic Safety Grade, which was developed in the partnership with a blockchain simulation platform named Gauntlet Networks. This gives a way to understand better the dangers they are taking when locking value in DeFi protocols.
The Economic Safety Grade is then calculated from a scale of 0 to 100, and then it measures a protocol’s risk of insolvency. When the score is higher, it means that it is a safe investment. It is another sign that an industry is working to break into the mainstream and then be more accessible to newbie users.
DeFi is an emerging industry based on a variety of blockchain-based protocols that use the code known as smart contracts to provide financial services such as loans or interest.
As a substitute for relying on centralized third-parties like the traditional banks, DeFi protocols use a value that has been contributed by the users in the form of cryptocurrency deposits to provide financial services; users will then receive interest income as a return.
DeFi pulse has been one of the leading indicators for tracking the growth of DeFi and then identifying the quality protocols; it uses a blockchain data to measure the total amount of the value that has been locked (TVL) in DeFi protocols and then providing necessary information about the projects’ functionality.
The DeFi Pulse Economic Safety Grade measures the risk of protocols becoming insolvent—that is, when the value of contributed collateral is less than the total amount of all loans that have been issued. If a protocol becomes insolvent, users that have contributed cryptocurrency to be used by the project are at risk of getting back less crypto than they put in, or, in a worst-case scenario, none at all.
The DeFi pulse Economic Safety Grade measures the risk of the protocols that have become insolvent when the contributed collateral value is lower than the total amount of all the loans that have been issued. When a protocol becomes insolvent, users with a contributed cryptocurrency used by the project are at the risk of getting back less crypto than what they put in, or worse, none at all.
Hitherto, grades have been assigned to two DeFi projects, lending services like Compound and Aave, they earned a 91% and a 95%, correspondingly. Scores are now updated in real-time based on the potential price movements and the borrowing patterns.
However, DeFi is still a new industry; it has recently caught the attention of crypto enthusiasts. It has taken nearly three years for the TVL in DeFi to gather its first billion, which it has hit on June 2020, yet less than four months to go from $1B to $10B.
The upcoming wave of growth will likely be relying on drawing in users with a little experience with crypto or none at all. Thus, the DeFi Pulse Economic Safety Grade can be a valuable tool to help the users stay safe, invest wisely, and then stick around for a long time.