Why DeFi needs a curation layer: introducing the Unstoppable Finance protocol evaluation framework

DeFi gets increasingly crowded. Retail investors need heavy, independent curation in order to navigate the complex landscape of protocols.

With over 18,000 crypto-assets, millions of smart contracts, and dozens of decentralized exchanges (DEXs), it has become increasingly difficult for retail investors to navigate the DeFi space.

Every day, hundreds of new projects are launched on-chain. Some represent innovation and viable long-term projects, but most are get-rich-quick-schemes, copy-cats, vampire attacks, or outright scams. Worst of all, many of these low quality DeFi projects are pushed aggressively by an army of bots or paid scammers.

In theory, the source code of DeFi protocols is open source and can be evaluated by anyone. Any shortcomings in the token’s economic model, a heavy reliance on third-party oracles, or bugs in the smart contract are out in the open to be discovered by anyone. The question is: Are these assumptions true for 99% of the population? Are non-technical people expected to navigate this increasingly complex and crowded DeFi space? We believe that for DeFi to reach the mainstream, it needs a powerful curation and rating layer on top, built by independent team of experts.

The curation we provide for DeFi applications will be one of our key value propositions: we meticulously vet every DeFi protocol that we consider integrating natively into our wallet’s frontend. In this article, we want to explore why we think a DeFi curation layer is essential and present a sneak peek into our protocol evaluation framework.

We offer curation, without sacrificing user freedom

It’s important to mention that our curation layer will not come at the expense of the open wallet character of DeFi. Users are able to access integrated DeFi protocols in-app via one or two clicks, but can also freely browse and connect our wallet to whichever DeFi protocol they choose.

There is no way we can adequately and efficiently assess the thousands of DeFi protocols, so it’s important that users who are comfortable exploring DeFi applications are able to do so, without having to ask for permission in a permissionless blockchain world.

A curation layer improves security, user experience, and complexity

Many reasons were already mentioned in the introduction, so we’ll keep it short. The three main arguments that stand out from our point of view are security, user experience, and complexity.

Security is valuable

The amount of money lost in DeFi hacks, scams, and other malicious activities more than doubled to over $1.3 billion in 2021. (Some reports estimate the total as high as $10.2 billion.) Regardless of the exact amount, it’s clear that the security of funds deployed in DeFi applications is a major obstacle on the road to mainstream adoption.

A lot of good work is already happening: insurance protocols like Nexus Mutual are seeing significant traction, it’s becoming normal for DeFi projects to hire professional auditors, and large bug-bounty programs incentivise “white hat” hackers to find and report vulnerabilities before it’s too late.

Additionally, regulators around the world are discussing how best to address consumer protection within DeFi. Well constructed regulations will bring the entire space forward, as long as they are adapted to the unique challenges and opportunities presented by open software protocols and decentralized governance. We as Unstoppable Finance are an active shaper of the regulatory DeFi agenda in Europe and are very prominently positioning us in this context to help shape sensible and progressive policies.

All in all, we are optimistic that dangerous and fraudulent DeFi protocols will over time be separated out by the community and builders in this space. But as a company with a mission of bringing DeFi to the masses, we need to take responsibility and actively contribute to that through our own proprietary curation layer.

User experience is valuable

Most users don’t want to have a choice of five different DEXs, and ten different yield protocols to pick from. Especially users that don’t use wallets daily or weekly prefer pre-selection over depth when it comes to features. (As indicated by our survey on non-custodial wallet usage) The majority of users prioritise simplicity and usability over almost everything else.

Don’t believe us? Look at the data. MetaMask generated over $200 million revenue in 2021 via their integrated Swap aggregator. This revenue is the perfect proxy for how valuable simplicity and UX is to users. Instead of connecting their wallet to an external DEX interface or aggregator, users preferred to stay inside the wallet and use the integrated swap feature, in exchange for a small fee. It’s clear that the intuitive usability and inherent trust of an established brand heavily outweighs the small costs for most users.

Source: Delphi Digital

We want to give our users the most intuitive, snappy, and simple experience to tap into the benefits of DeFi. Curating and natively integrating single applications into our wallet frontend is a huge pillar of our UX-first approach.

Reduced complexity is valuable

Risk assessment of DeFi protocols is one of the hardest problems. There are already dozens of teams around the world from both traditional finance and crypto, trying to accurately approximate DeFi risk. It involves an evaluation of the code, the token-economic structure, the governance framework, reliance on third parties or single points of failure and much more.

Neither we nor our users can assess the risk of a DeFi protocol with absolute certainty, so 100% security remains as impossible to achieve. However, because we spend most our time evaluating new projects, teams, and business models, we believe that we are in a better position than most others to build a curation layer of protocols and assess them in the context of a retail investor audience. To this end, we are hiring the best people in the industry in order to build a dedicated DeFi research and ratings unit, allowing us to become the leading voice in independent protocol risk assessment.

Let’s now explain how we evaluate promising DeFi applications.

Unstoppable Finance Evaluation Framework

At the end of the day, there needs to be a fit between the DeFi project we integrate and our wallet product and company philosophy. Admittedly, not all of that is based on hard, quantifiable criteria. But much of it is, and we try to operationalise as much of our thinking as possible into a more quantitative, measurable evaluation framework. We are looking forward to sharing the framework with the larger community after it has matured and become battle-tested.

For now, here is a glimpse of our main criteria and considerations. We divide our framework for assessing DeFi protocols into seven categories:.

1. Team
2. Tech
3. Security
4. Legal/Compliance
5. Community/Governance
6. Market
7. Marketing

Each of these categories is then broken down into four to five more granular criteria.

For example, the security category has, amongst others, the following criteria:

• “The protocol has been battle tested with a significant TVL ($100m+) for a significant amount of time (>6–12 months) ”
• “The code has been audited professionally by reputable companies”
• etc.

As another example, the community/governance category has, amongst others, the following criteria:

• “The protocol mobilizes a broad and energetic community (20k+ Twitter followers, 10k+ Discord server members, with number of interactions and posts, etc.)”
• “The products governance is active, constructive and driven by the long-term health & success of the product (high number of governance proposals, voter participation etc.)”
• etc.

We assign a score to each criteria, and since some criteria are more important to us than others, we assign a weighting (1–3 points) to each of them. Eventually we can compare protocols by their weighted scoring by category and in total.

Every protocol we are considering to integrate into our app is evaluated using this framework and benchmarked against competing protocols and existing integrations.

In doing so, we make sure that the gut feeling we got from our research is supported by a hard, quantifiable score. As mentioned previously, not every criteria is 100% quantifiable and we see the framework as more of a decision support vs. decision maker.

Conclusion

In order to remove the complexity around security and usability, more and more users will access DeFi through a dedicated curation layer. Researching and assessing new DeFi protocols or picking them based on what’s popular on Twitter is not a viable solution for most. It’s the role of financial institutions, fintechs, and crypto wallets like us to pre-select and thus curate the most useful and safe DeFi applications for their users.

With our DeFi protocol evaluation framework, we aim to make our choices as objectively as possible and operationalise this process for the future.

However, our vetting is only one part of a more comprehensive long-term solution for DeFi mass adoption that includes insurance and (self-) regulation— developments which we support and where our framework could add value to the discussion.

By offering curation while retaining users’ ability to freely browse and connect to any protocol, we will provide the best of both worlds.