Earlier today, blockchain software technology company ConsenSys announced the launch of ‘DeFi Score,’ – “an open-source methodology to evaluate code and financial risk in DeFi lending.”
‘DeFi’ or Decentralized Finance applications are products built on blockchain which allow for complex financial products like lending and borrowing platforms, asset management tools and decentralized exchanges.
In the announcement, ConsenSys also spoke about how it wants to promote transparency and understanding about the technical and financial risks associated with DeFi lending markets. Using a 10-point scale to evaluate risk, the model uses several attributes to calculate a score on the basis of technical properties, liquidity and regulatory risk, using two broad categories, smart contract risk and financial risk, to capture a crypto-market’s risk attributes. The official press release added,
“Not all lending platforms are created equal. Different lending products have very different risk/reward profiles, which makes comparing their rates alone akin to comparing apples to oranges.”
According to ConsenSys, lending platforms tend to share the same smart contracts across their markets, making it the most relevant factor while comparing platforms. Financial risk focuses more on liquidity, which depends on market conditions. A market with low liquidity will receive a low score. The announcement also mentioned how the volatile nature of crypto-assets makes high collateral factors insufficient. Essentially, on-chain data about a market’s collateral ratio and portfolio will also impact the score.
Though these are the major factors, ConsenSys’s DeFi score will also take into account regulatory concerns at a smaller level, but they expect this to become a bigger factor in the future. ConsenSys is also looking into new data points which could improve the utility of the score. However, it stressed that it is not a validated statistical model and more of an opinion-based framework to initiate conversations for estimating and communicating risk in these markets.
The news of this launch comes just days after ConsenSys announced Codefi, a service which utilizes blockchain to optimize business processes and payments, digitize financial instruments, and builds tailored decentralized applications.
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