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How to Research DeFi Protocols? Obviously, everyone wants to earn big with minimal risk and effort. So when a 10% annual yield on a USDC deposit in AAVE stops inspiring you, you start looking into various protocols and strategies that could potentially deliver many times the return. And that brings us to the question: how exactly should you go about doing this? Let’s muse on that.
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To find attractive yields, you could, for example, head over to Defillama in the Yields section, filter for stablecoins in pools with at least $1 million in TVL, and get an overview of activities where yields can reach up to 80% per year. Sounds pretty cool, right? But before you commit your hard-earned money (i.e., invest) in any protocol, you need to answer a few questions: ⏺️ Is this protocol secure? ⏺️ Is the token I’m buying safe? ⏺️ Where is the yield coming from? Let’s take a closer look at each question.
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The Security of the Protocol is primarily determined by its smart contract – the code that, if it contains vulnerabilities, can become a target for savvy hackers. But most of us aren’t programmers and aren’t well-versed in the intricacies of Solidity (or other languages used in networks like Solana, Aptos, Sui, etc.), so we have to rely on indirect indicators. That said, here are some steps you can take at this stage: 1️⃣ Check for Open Source Code on GitHub. Open source code lets the community inspect it, spot bugs, and help fix them, which increases the likelihood that the code is “clean.” It’s also important to evaluate the team’s activity and how frequently the repository is updated.
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2️⃣ Utilize Neural Networks and Specialized Tools for Quick Analysis. You can feed a project’s documentation to a neural network (for example, AAVE docs) to get a general understanding. Meanwhile, services like De.fi and Certik (can help highlight potential risks in the smart contracts.
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3️⃣ Evaluate Application Forks. A fork is a copy of the source code—sometimes with modifications—that results in an application that works under the same principles and usually with a similar level of security (without the extra potentially “dirty” code). Defillama has an entire section dedicated to this; for example, a fork of AAVE or Uniswap is generally safer than a completely new project. 4️⃣ Pay Attention to Audits and Bug Bounty Programs. Audits from companies like PeckShield, Certik, OpenZeppelin, and others provide insight into whether there are any critical vulnerabilities. Projects often display audit information prominently. And if a project has a Bug Bounty program, that’s another green flag. For example, check out AAVE’s security section.
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5️⃣ Assess Indirect Indicators of Reliability. TVL (Total Value Locked) – the higher, the better, as it tends to inspire more trust in the protocol. It’s also important to know how long the project has been around, whether there have been any security incidents, and how the team responded to them. And, of course, consider the team itself: the more information you have about them and the more successful projects they’ve been involved in, the easier it is to sleep at night. ❗️It’s important to understand that no single factor guarantees 100% security on its own, but combining all these measures can significantly minimize risk. After all, even if AAVE were to be hacked, there’s a 99% chance that the project would compensate investors for their losses. To be continued..
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