DeFi projects losing millions to protocol vulnerabilities underscore their high-risk profile. A robust investment research framework includes:
Code Audits and Security: Verify if the protocol has undergone audits by reputable firms like Trail of Bits or OpenZeppelin. Check for past exploits—e.g., the $80M Rari Capital hack in 2022 due to reentrancy issues. Bug bounty programs signal proactive security.

Protocol Metrics: Assess TVL and user activity. A TVL above $500M, like Aave’s $6B in 2023, suggests trust, but high TVL also attracts hackers. Monitor transaction volume for adoption trends.

Oracle Dependency: Examine oracle usage for price feeds. Centralized oracles, as in the $100M Mango Markets exploit in 2022, increase manipulation risks. Prefer protocols using decentralized oracles like Chainlink.