Operation Risk

Operation risk is divided into five categories: Team, Maturity, Governance, Counterparty, and Legal. Let's explore the importance of each category below.

Team

Weight: 25%

Evaluation: The 'Team' aspect of operation risk involves a comprehensive assessment of the individuals behind a protocol. It delves into the background, qualifications, and relevant experience of the founder(s) and key team members. While these aspects may not directly influence the quality of the protocol, they provide crucial insights into the team's capabilities, strategic vision, and commitment to their product.

The review process for the 'Team' category involves a thorough examination of the team's background and experience in the field of blockchain and decentralized finance. Consideration is also given to their level of transparencyβ€”how open they are about their identities, their roles within the organization, and their strategic vision.

Sample Question:

  • Team Background:

    • Who are the Founders and what are their background?

    • Do the Founder and the team have related experience?

Operation Maturity

Weight: 15%

Evaluation: 'Operation Maturity' refers to the protocol's operational track record. It considers factors such as the length of operation and the handling of past incidents. A protocol that has been in operation for a significant period is likely to have undergone more rigorous testing and faced real-world scenarios, offering valuable insights into its resilience and reliability.

The review process for 'Operation Maturity' involves an examination of the protocol's operational history. The length of its operation, its track record in handling incidents, and the lessons learned from these incidents are all scrutinized. While these factors may not directly correlate with the protocol's current quality, they can provide important context for understanding its potential resilience to future challenges and overall operational competence.

Sample Question:

  • Operation History:

    • How long has the protocol been running?

    • Is the protocol battle-tested?

    • Are there any past incidents?

Governance

Weight: 25%

Evaluation: In the context of DeFi, 'Governance' refers to the democratic process employed by Decentralized Autonomous Organizations (DAOs) to make decisions about the protocol's direction and rules. These decisions could range from minor changes in parameters to significant system overhauls. DAOs often use native tokens to facilitate this process, granting token holders the right to vote on proposed changes. This model ensures that those who have a stake in the protocol's success are the ones guiding its future.

The evaluation of 'Governance' focuses on the structure and efficacy of a protocol's decision-making system. This includes assessing the level of decentralization in decision-making, the size and engagement level of the community, and the extent of their participation in voting. A robust governance structure should promote a high degree of decentralization and active community involvement, ensuring that decisions are made by those most invested in the protocol's success.

Sample Question:

  • Community:

    • Is the community sizable?

    • Is the community actively involved in decision making?

    • Is the governance right sufficiently decentralized?

Counterparty

Weight: 15%

Evaluation: 'Counterparty Risk' here refers to the potential risk stemming from reliance on other protocols or platforms in a protocol's operation. Essentially, it's the risk that a counterparty in a transaction or operation fails to meet their obligations. For instance, a protocol built on top of another protocol may face issues if the underlying protocol suffers from a security breach or operational failure.

Reviewing 'Counterparty Risk' involves examining the protocol's dependencies and interconnections within the larger DeFi ecosystem. It includes assessing the stability and security measures of any underlying protocols or platforms the protocol relies on. Additionally, the review considers the protocol's contingency plans in case of failures in these dependencies. This comprehensive evaluation ensures that users are aware of any potential risks posed by third-party platforms, facilitating informed decision-making.

Sample Question:

  • Protocol reliance:

    • How likely is the protocol going to suffer loss due to partners failure?

Weight: 20%

Evaluation: 'Legal/Regulatory Risk' here refers to the potential for protocols to face legal consequences or regulatory actions. This could stem from non-compliance with various jurisdictional laws or regulatory standards, or due to the evolving nature of regulations in the digital asset space. For instance, a protocol could be subject to sanctions, enforcement actions, or legal challenges from regulatory authorities or law enforcement agencies.

Reviewing 'Legal/Regulatory Risk' requires an analysis of the protocol's compliance measures and its preparedness for potential legal or regulatory changes. It considers the protocol's efforts to comply with relevant jurisdictional laws and whether it has mechanisms to adapt to evolving regulations. This helps users to understand the legal and regulatory landscape of the protocol, enabling them to gauge the associated risks effectively.

Sample Question:

  • Legal Compliance and Potential Risks:

    • Is the protocol involved in any lawsuit?

    • Does the protocol operates in an area at high risk of legal enforcement?

    • Does the protocol native token have a higher risk of being alleged to be a security under US law compared to other tokens?

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