Liam Frost · 12 hours ago · 2 min read
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To achieve its goal of financial disruption, DeFi requires a decentralized rating protocol. Evai.io aims to provide such a system.
Decentralized finance (DeFi) is now considered blockchain’s killer app—responsible for unleashing billions in dormant potential. But as with any investment boom, the sector has its winners and losers. Without an unbiased, fit for purpose rating system embodying the decentralized nature of the sector it’s assessing, DeFi is doomed to fall for the same trappings as financial divisions before it.
DeFi is the crypto industry’s answer to the borrowing, lending, and other such interest-bearing practices of traditional finance. But unlike more conventional investment vehicles, DeFi is decentralized. This means that no central authority controls the flow of capital or data, decreasing counterparty risks by removing intermediaries and reducing inefficiencies, costs, and effectively negating the need for trust. In theory, DeFi is a utopia that has captured the minds of financial libertarians and crypto evangelists alike. The reality, however, is a little murkier.
DeFi’s Growing Pains
In a little over 2 years, the DeFi sector has grown from just $4 in total value locked (TVL) to approximately $6.7 billion in TVL, according to data from DeFi Pulse.
In other words, throughout the sector’s short existence, investors have chosen to place a multibillion-dollar bet on DeFi by locking up value in various borrowing, lending, and investment schemes — resulting in an incredible 167 million percent growth. Even more mind-blowing is the fact that more than $6 billion of that value was appended to the sector in 2020 alone.
As such, the DeFi boom is often analogized to the ICO rush circa 2017. Both witnessed huge volatility and upside gain but simultaneously became overwhelmed by scams, frauds, and lackluster project coding—rendering attack vectors for bad actors. The two sectors have similarly bore tokens with little intrinsic value, with only 10% of the 5,000+ cryptocurrencies created during the ICO bubble possessing a live use case — and then there’s DeFi.
For the nascent sector, the bulk of its growth has been ushered by “yield farming,” an incentivization program initiated in an effort to drive liquidity to DeFi platforms. By rewarding borrowing and lending via tokens listed on their platforms—and thus encouraging the locking in of additional value — these projects have propelled prices for specific tokens beyond reasonable valuation.
A prime example of this comes from yEarn Finance’s platform, a yield aggregator that hunts down the best lending pools to maximize interest. yEarn Finance’s YFI, a token used to reward liquidity providers, has catapulted some 44,017 percent since its inception back in July, climbing from $34 to a peak of around $15,800 in August per data from Coingecko. All this despite the fact that Yearn.Finance founder, Andre Cronje literally admitted to the token’s lack of value.
“We have released YFI, a completely valueless 0 supply token,” said Cronje. “We re-iterate, it has 0 financial value. There is no pre-mine, there is no sale, no you cannot buy it, no, it won’t be on uniswap, no, there won’t be an auction. We don’t have any of it.”
Nevertheless, looking to capitalize on the success of DeFi and, in particular, yield farming, other tokens have propped up, capturing the eagerness of captivated investors.
Yam is one such token.
Confessing to being completely unaudited, Yam describes itself as a “minimally viable monetary experiment.”
We were serious about this being an experiment and the code being unaudited. Please exercise some caution.
— Yam Finance (@YamFinance) August 11, 2020
Immediately after launch on August 11, investors poured their millions into Yam, inflating its market cap from zero to $60 million in a mere two days. But less than 48 hours after shipping, its founders pulled the plug on the project after discovering a bug. Yam’s entire market cap evaporated shortly after, along with millions in investor capital.
It’s not just dubious projects and pumps and dumps either, fake tokens are abounding in DeFi as well. To top it all off, thanks to unaudited coding and loopholes exploits and hacks are just as prolific.
But DeFi isn’t all doom and gloom, after all, it hasn’t amassed an $8 trillion market cap from speculation alone. Still, there’s no denying, much akin to many of its projects and tokens, that the DeFi ecosystem is in desperate need of a sector-wide audit.
EVAI: Evaluating DeFi
Despite DeFi horror stories and growing pains, many believe that the sector could go on to disrupt the financial industry entirely.
DeFi encapsulates the best of cryptocurrency utility, enabling wealth creation via borrowing, lending and staking while leaning on decentralization to avoid the need to confer trust, data, and capital, over to middlemen and centralized institutions. Minimal fees, higher yields, global liquidity, and the elimination of counterparty risk, are worthy bait to lure investors in — traditional or otherwise. But DeFi’s financial utopia isn’t possible without an appropriate rating system.
The problem remains that any such rating system cannot — and should not — be centralized.
Several rating platforms already exist, claiming to assess DeFi and other crypto-centric assets equitably and impartially. But no matter the intention, human beings are inherently biased. You only need to look as far back as the Great Recession of 2008 to comprehend the pitfalls of a centralized rating system.
The main instigators for the Great Recession came in the form of dishonest credit rating agencies who dressed up hugely risky asset-backed securities — known as debt obligations (CDOs) — as top-rated investments without appraising the quality, or risk, of their underlying assets.
The absence of investor knowledge, and indeed information, coupled with trust and reliance in a careless and biased rating system, brought the financial system down single-handedly. In hindsight, the crisis that sparked the subsequent recession could have been avoided had a reliable, impartial, and decentralized rating system been in place.
The lessons of the Great recession act as some of the primary motivations behind Evai, a decentralized cryptocurrency rating platform. Aiming to instill legitimacy into the cryptocurrency sector, Evai eliminates cognitive bias and partiality by leaning on a six-factor rating model. The model, dubbed “The Bridge,” borrows learnings from the academic research of University of Brighton professor of economics and Evai co-founder, Prof. Andros Gregoriou.
The Bridge appraises cryptocurrency assets based on several criteria including their inclination toward systematic risk, liquidity, expected profitability, rate of change in asset price, aggregate demand, and investment — all to determine the optimum exposure for a particular asset.
The Bridge also makes use of artificial intelligence (AI) and machine learning to both determine the ideal investment allocation as well as evolve and self-correct the rating system. Working in conjunction with this is the EVAI token — a proof of work-based ERC-20 standard token used to incentivize holders to contribute ideas and market expertise to the ever-expanding development of the Evai rating platform.
Uprooting from centralization is critical to an effective rating system. To do so, Evai remains entirely independent and doesn’t receive any funding or collect fees from rated projects.
As DeFi strides toward the disruption of the traditional finance sector, investors require a reliable, impartial, and decentralized rating platform to navigate to the most suitable investments — Evai aims to provide such a platform. Find out more at evai.io.
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