Thread by @Route2FI

How to make it in DeFi part 2 - What are the risks?

You've probably seen that there's a lot of new DeFi protocols popping up every single day.

But how do you know if you can trust a DeFi protocol?

And how much should you invest?

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It's about time we talk about risks and where to seek information in the DeFi space.

First of all, if you missed part 1 you can find it here:

https://twitter.com/Route2FI/status/1469645315301122048?s=20

Now, let's talk about risks in DeFi and what you should look out for:

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1. Smart contract risk: all small contracts can get hacked.

This isn't something you can spot immediately.

You should therefore look if it's audited by firms that are well-known (more about this later)

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2. De-peg risks: This is very important for stablecoins (think: what if USDT/UST/DAI isn't worth $1?), but it's also important for tokens that are pegged to the native token (eg. FTM/TOMB)

3. Liquidity risk: Let's say you lend out your tokens to a DeFi platform, and...

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then the DeFi platform lets people borrow your tokens.

If you want to withdraw your tokens you can't (unless there are tokens available at the moment).

Don't think this is a huge risk, but it's worth mentioning.

4. Bank-run risk: A bank run happens when suppliers...

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attempt to rapidly and simultaneously withdraw more funds than are available on the platform, causing further panic and distrust of the system.

In extreme cases, the DeFi protocols reserves may not be sufficient to cover the withdrawals.

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5. Admin key risk: Always be on the lookout for centralized admin controls that allow a developer or team to lock or move funds deposited into the DeFi app.

Changes should only be allowed with approval from multiple parties or a DAO that governs upgrades and proposals.

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All right, you're probably tired AF of reading theory about risks, right?

Let's have a look at how I gather information and what I look for in a new DeFi project:

Step 1: Social media: When I hear about a new project...

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the first thing I do is to check their Twitter page and if they have a Discord/Telegram channel.

Are the projects followed by many people on Twitter?

And is their following good? I've been on Twitter for a while, so it takes me a max of 30 sec to spot if a project seems...

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promising or not.

Another metric I watch is how many of the people I follow are already following the project. If there's no one, then that's probably not a good sign.

Step 2: Whitepaper/roadmap: If the information I find through Twitter/Discord looks promising...

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I check their website and the whitepaper. It's important that the project has a solid roadmap.

If there's no roadmap/whitepaper I stop my researching process here.

Step 3: Is the project audited?

Audits are the first line of defense when it comes to finding a safe...

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staking/yield farm. But even if a project has been audited, your funds are never 100% safe.

You see, the auditing process is not equally good in all auditing companies.

4 things to think about:

1. Is the protocol really audited? Lots of protocols bluffing about this

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2. When a DeFi protocol wants to get an audit they can send the code that they're using, get it audited but then launch with a totally different code. The contract should therefore be on-chain, not on Github.

3. The DeFi protocol may hide some of the code (not delivering...

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everything for an audit).

4. Quality of the auditor/audit company: The most famous auditing companies: OpenZeppelin, Certik, PeckShield, Trail of Bits, Obelisk, Solidity Finance, Omniscia, Paladin, Hacken, and Consensys Diligence.

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There are a lot of auditing companies and the list could be longer. If you don't feel safe about the company, ask a friend you trust if it is legit.

Step 4: Find out more about the team. Are they doxxed with their full names? Or are the team anons?

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Anons are also good, but it's for sure easier to trust non-anons.

At least try to find out more about what they've done earlier, what they've worked with etc. You can also send a DM to the team.

Step 5: Check @DefiSafety. It's a review of different protocols...

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Takes a while before new protocols are getting listed here, but for the protocols you want to put a lot of money in, they should be listed here.

Also worth checking rugdoc.io to read more about the DeFi protocols.

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Step 6: If the protocols are checking off on all the 5 steps, I feel safe about going in.

I always buy a small sum first, just to check that the protocol works smoothly and that the staking/unstaking function works.

On one occasion I put money in a protocol and...

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there wasn't an option to unstake (money lost).

Step 7: Discuss with friends on Twitter about the protocol, if all your crypto-skilled friends are negative it could be a red flag.

Step 8: On several occasions, you're going to hear about DeFi protocols that don't

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checks off on all these steps in terms of security.

Personally, I'm not allocating more than a max of 5% of my total portfolio for these high-risk projects.

Let's have a look at 4 protocols I like and I'm going to rate them with a 1-10 risk.

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(A risk of 1 doesn't mean that it's risk-free, because you always have smart contract risk):

1. Anchor Protocol Earn Savings account:

I have already written about Anchor here, so make sure to check out the thread before you move on:

https://twitter.com/Route2FI/status/1442835869879181312?s=20

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I'll quickly summarize it here:

Fully doxxed team with the CEO @stablekwon as the anchor of Terra behind them.

The Terra ecosystem is built around Anchor Protocol which makes me trust this.

Anchor Protocol is triple audited.

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They have a bug bounty program that gives you several $10-$150K if you find errors in the code.

A huge following on Twitter. The interest rate on Anchor has been between 19-20% since its launch.

Risk level 1.5/10 (low risk)

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2. @Wonderland_fi ($TIME): A $OHM fork made by @danielesesta (doxxed).

Launched in September. High APY (80,000% which makes people think it's a scam). It's unaudited (as far as I know), but it's a fork of $OHM (which has been audited twice: PeckShield and Omniscia).

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The platform itself is super-solid, the risk here is the tokenomics model (DeFi 2.0), which means it is as risky as $OHM, $HEC, $JADE++.

In order for $TIME to grow, we need more money into the system. My personal expectation is that $TIME and the other forks will perform..

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well in bull markets, but have a hard time in consolidating markets and obviously bear markets.

Look at $TIME as an asymmetric bet that can make you money if you hold it long-term, but it's super volatile and in case we have a bank-run situation you may lose...

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most of your holdings. So this is a high-risk bet, which can make you a lot of money (or eventually lose it all).

My personal allocation is 10% max. to DeFi 2.0 and tokens like $TIME.

Super-solid on social media and Daniele is a rock-solid CEO...

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Risk level: 9/10 (because of the tokenomics, $TIME itself is solid).

You can read my full thread about $TIME here:

https://twitter.com/Route2FI/status/1456275514889433091?s=20

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3. FTM/TOMB:

You could eg. use this strategy on Grim Finance and Reaper Farm.

Both of these DeFi protocols are audited by Solidity.

You get around 1,000% APY for having your $FTM and $TOMB 50/50 in a liquidity pool.

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I've written about $FTM and $TOMB here:

https://twitter.com/Route2FI/status/1463814714304212992?s=20

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In this yield farm, you have no impermanent loss (read about impermanent loss here:

academy.binance.com/en/articles/im… ), which is unique in terms of yield farming and that's why this strategy has become a favorite among lots of degens.

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The biggest risk is if $TOMB totally de-pegs from Fantom.

Then you're in a yield farm with a quality token (Fantom) and a worthless token, which makes you lose money.

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The Tomb project is backed by @harryyeh, and I feel confident that this project is solid.

Risk: 6/10 (because of advanced tokenomics).

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4.Abracadabra $UST-$MIM Degenbox Strategy:

Abracadabra is an initiative by @danielesesta and @0xM3rlin

Supersolid platform with lots of degen strategies.

You can read my step-by-step thread here:

https://twitter.com/Route2FI/status/1458072000602202114?s=20

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his strategy includes using $UST as collateral to borrow $MIM with leverage in order to maximize your stablecoin yield.

On Anchor Protocol you can get 20%, with Abracadabra you can get over 100%. The risk is liquidation.

If $UST goes lower...

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than your liquidation price, you will lose your collateral and it will be game over (at least for your money on Abracadabra).

Hard to give an exact number of risk levels here, because it depends on the amount of leverage you use.

Risk: 5-10 (depending on the leverage).

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There's a lot of DeFi protocols out there, and it's impossible to monitor them all.

I think the best way is to focus on some ecosystems rather than to try everything.

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I hope you learned something new in this thread. If I didn't answer all your questions, make a comment below and I'll try my best to answer it.

Eventually, maybe I can add some extra tweets to the thread with things I haven't written about.

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If you like my work, follow me on Twitter at @route2FI and subscribe to my free newsletter here:

getrevue.co/profile/route2…

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If you liked this thread, I would love it if you could share it with others by retweeting the first tweet 👇

https://twitter.com/Route2FI/status/1472232653944459264?s=20

Thank you!

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