As a DeFi project building a decentralized risk modeling platform we needed to engage potential users to understand exactly what our community would find useful. When Credmark first connected with the CoinShift team, they were seeking to expand their treasury management solution built over Gnosis Safe to enable safe deployment of treasury assets into DeFi protocols. It immediately became clear how a partnership would be beneficial to both projects. CoinShift was seeking risk expertise that could be scaled to their customers and we wanted to understand what types of risk were important to the DeFi community writ large.

For our initial engagement, we worked with Coinshift to focus research on lending protocols, specifically Aave and Compound. Lending protocols are a logical starting point for examining risk because Yield Farming Apps and other DeFi protocols are built on top of them and thus inherit their risksThe output is a risk report applying standard TradFi tools to both protocols. Our strategy is to leverage existing institutional banking tools to establish a quantitative base for idiosyncratic and comparative analysis. DeFi specific tools will come down the line, but because the industry is so new, and available risk tooling so scarce, it would be impossible to create a comprehensive toolset or assessment from the jump. As such, our report focuses on 4 areas:

• Market Risk, or the exposure to losses caused by changing prices of assets held by a protocol
• Liquidity risk, or the potential for a lending protocol to owe more to depositors than assets they control
• Operational Risk, or quantifying the impact of a potential operational model event, for example a hack
• Profitability, or cashflow analysis, while not a risk metric, is a strong consideration in DeFi
  

By examining each of these qualitative and quantitative factors, the DeFi community can clearly understand risk factors associated with lending protocols. Understanding the variables we analyzed is a necessary building block. Future collaboration with CoinShift and other partners will expand our areas of focus until we can comprehensively measure risk in DeFi. It also serves as a tool for CoinShift to understand their customers risk appetite, and what the demand is for tools that can be added to their platform

Our Aave and Compound risk report also serves another important purpose: bootstrapping the ecosystem between community risk needs and our platform. We are deliberately choosing to build a network of community partners, rather than an non-engaged network of B2B clients. Our mission is not to create a for-profit entity, but rather to build a Distributed Autonomous Organization. For that reason, we ask our research partners to pick up and hold CMK- doing so aligns incentives and makes them part of our community. The tokens can be used for voting, and once our platform is live, for accessing Credmark data. We are proud to have CoinShift as the first participant in our community partnership program.

You can read our initial risk report in Gitbook here. Join our Discord and follow us on Twitter to watch our research continue to develop. We love to hear thoughts and ideas from our Community and are always seeking new partners- reach out in our Risk channel if there is an area of DeFi you think we should cover! If you have a project with specific risk needs, we would love to engage you as a new partner. We look forward to hearing from you!