EEA DeFi Risk Assessment Guidelines

EEA DeFi Risk Assessment Guidelines

The Enterprise Ethereum Alliance (EEA) DeFi Risk Assessment Guidelines is a framework for evaluating risks across DeFi protocols. These guidelines were developed with the input and expertise of over 35 industry leaders from organizations such as Consensys, DTCC, EY SAP, OpenZeppelin, Hacken, and DeFi Safety contributing hundreds of hours of dedicated work.

It draws on the expertise in various areas of DeFi and accounting that its contributors bring, to provide a broad-based and industry-backed guide to the risks involved in working with DeFi, and how to assess, manage, account for and mitigate them.

It is structured to provide insights into DeFi basics, detailed risk assessments for DeFi assets, key information for risk assessment, and strategies for mitigating various risks. It also addresses the regulatory ambiguity and the lack of standardized accounting practices in DeFi.

The document is intended for DeFi protocol stakeholders including users, investors, developers, and aims to inform regulators and standards organizations.

Importance of Due Diligence

"If you don't understand the source of the yield, you are the yield."

Due diligence plays a vital role in managing risks associated with decentralized finance (DeFi) protocols. Before participating in any DeFi protocols, it is necessary for stakeholders to thoroughly research key aspects of the protocol's design and operations. This allows them to fully grasp the risks and rewards linked to engagement.

An effective due diligence process entails carefully reviewing the protocol as per EEA DeFi Risks Assessment Guidelines, covering smart contract code audits done by reputable security firms, analyzing the tokenomics and incentive structures baked into the protocol, and evaluating the capabilities of the founding team along with the strength of the project's community.

Furthermore, studying historical price data aids in anticipating volatility across market cycles.

While robust due diligence takes significant time and effort, it equips users to gauge the trustworthiness and resilience of a protocol. Factors like transparency, security, decentralization and liquidity can be assessed more accurately after gathering enough information about the project's inner workings. Conducting this research is essential for making well-informed decisions regarding which DeFi protocols are worth engaging with based on one’s risk tolerance and aims within the ecosystem. The insights gained allow users to manage risks proactively.

Resources

Enterprise Ethereum Alliance (EEA) DeFi Risks Assessment Guidelines (16 January 2024): https://entethalliance.org/specs/drafts/defi-risks/20230116/