Evaluating a decentralized finance (DeFi) protocol requires analyzing its operation and token distribution. According to the report shared by IntoTheBlock, organizations are interested in how the protocol creates long-term economic value while minimizing dependence on short-term token incentives. The fluctuating nature of the market means that sustainable mechanisms must be maintained so that users can continue to participate.
Large-scale deployments in DeFi protocols exceed the hype. They require a thorough assessment of risk, protocol resilience and capacity.
Discover our in-depth analysis in our latest article👇https://t.co/L0yi3FS5kE
— IntoTheBlock (@intotheblock) January 5, 2025
Tokenomics evaluation plays a crucial role in assessing the long-term viability of the protocol. Key factors include the process of distributing the incentive tokens, the fully diluted value (FDV), and the potential slippage risks during the tokens’ unlock phase.
Organization stakeholders review the overall incentive offering and schedule for its release to determine the feasibility of implementation. Converting the security to cash affects the market price in a way that is mitigated by the fact that the circulating size of the deployed nodes is not controlled, while they are not the largest token holder.
Assess security measures
IntoTheBlock emphasizes that security remains the main focus when assessing decentralized financial protocols, and that the analysis also includes technical and economic features. Technical reviews analyze the audit history and procedures for the technical environment, and newer improvements undergo extensive testing. Such protocols are reviewed to ensure that certain procedures are resolved where necessary.
Economic security involves oracle mechanisms, electronic universal liquidation processes and exposure to assets with low liquidity. With opportunistic pricing in oracles, collaterals can lead to miscalculations, leading to potential losses. Several factors related to liquidation should prevent insolvency behavior, making collateral and bonus structures fair.
Feasibility of implementation and liquidity management
Several considerations must be made to determine whether a particular protocol can be deployed, including the feasibility of the strategy’s size and liquidity. Organizations also consider the barriers to entry and exit, especially when adopting strategies for offering liquidity pools or staking. The cost of converting tokens during entry and exit points is manageable if one understands the slippage involved, maximizing returns.
Protocols that provide liquidity pools of automatic market makers (AMMs) present unique challenges. Historical liquidity, pool token distribution, and market depth are indicators for assessing pool stability and capacity.
In credit markets, the markets’ ability to provide liquidity and interest rate dynamics has a significant impact on betting decisions. According to IntoTheBlock, major suppliers are managing the key risks of locked-in liquidity, while borrowers are concerned about the kink in the interest rate model telling them that costs could rise sharply. Calculating historical averages of liquidity and credit facilities ensures that institutions set their goals in line with the market.
Institutions that adapt to the structured framework of protocol evaluation can properly manage DeFi opportunities. By doing so, they develop their ability to allocate resources efficiently, with the aim of providing sustainable and secure development in the rather volatile environment of the DeFi market.
