Crypto Long & Short: Risk Ratings: DeFi’s Maturity Test

Core Insights - The DeFi risk rating system is designed to adapt to the evolving nature of on-chain risks, providing daily updates to inform investment decisions [1][2] - Traditional credit ratings are criticized for their infrequent updates and reliance on analyst judgment, which can lead to significant failures in risk assessment [2] - The Credora rating system utilizes a probability of significant loss (PSL) metric to provide a clearer understanding of risk, moving beyond traditional volatility measures [4][6] Group 1: DeFi Risk Ratings - Credora is the leading platform for DeFi risk ratings, offering a live data feed that helps both individual and institutional investors assess risk before deploying capital [1][6] - The ratings are standardized to allow for comparison across different DeFi assets and strategies, enabling investors to make informed decisions based on risk-adjusted returns [6][11] - The PSL metric measures the annualized probability of losing more than 1% of principal due to bad debt, providing a solvency-focused assessment rather than a volatility-focused one [4][5] Group 2: Historical Context and Failures - Past failures in the DeFi space, such as the collapse of TerraUSD (UST) and xUSD, illustrate that risks often accumulate over time rather than appearing suddenly [3][4] - The lack of timely and accurate risk information has contributed to significant losses in the DeFi market, highlighting the need for effective risk ratings [2][6] - If UST and xUSD had received appropriate risk ratings, many investors might have avoided deploying capital into these assets, potentially saving billions [6] Group 3: Future of Risk Ratings in DeFi - For risk-aware DeFi to gain traction, risk ratings must become standard practice, allowing users to filter strategies by risk grade [11] - The integration of risk ratings into wallets and financial platforms will facilitate better decision-making and reduce reckless capital allocation [11] - As the DeFi industry matures, risk ratings are expected to become essential, enabling trillions of dollars to flow on-chain while minimizing exposure to unnecessary risks [11]