DeFi Protocols
DeFi protocols are bringing the world of finance onchain, but those deposits are reliant on people feeling safe holding their capital outside the traditional system. With hacks and losses being a nearly constant presence in news headlines, investors have begun to pay attention to the risk behind the yield. After the Kelp DAO/LayerZero/Aave incident, DeFi TVL dropped nearly 15% in just a few days, bottoming about 30% down before starting to recover. This shows the sensitivity of capital to risk and the importance of properly managing it.
Risks faced
As a protocol’s TVL grows, so does the risk.
• Smart contract exploits in any protocol holding fund capital
• Centralized exchange failure, including halted withdrawals and exchange-wide haircuts
• Stablecoin depeg on reserves, collateral and settlement assets
• ETH liquid staking and restaking token depeg
• Oracle failure and manipulation feeding a bad price into an open position
• Liquidation failure that leaves bad debt behind
• Leveraged liquidation and unrealized loss on looped strategies
• Governance takeover at a protocol holding fund assets
Relevant products
Native Protocol Cover lets a protocol cover its own code, so protection sits with the team rather than depending on each depositor individually. The other option is to make Protocol Cover available for the protocol, so depositors can manage their own risk. Anything that doesn’t fit a standard listing can be structured as Bespoke Cover.
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