Evolving DeFi Standards: The Trust Game
Market standards are a broad topic, encompassing everything from best practices for key stakeholders (e.g., financial reporting requirements) to specific technical interactions (e.g., FIX protocol). In DeFi, where specific regulations remain nascent, the ecosystem has relied on competition for trust and capital to drive the evolution of elevated standards. This competition has not only created a more secure environment for participants but has also incentivized transparency and innovation.
The Evolution of DeFi Standards
In 2020, during the outset of DeFi Summer, many protocols launched and gained traction without completing smart contract audits. Total Value Locked (TVL) in DeFi exceeded $10 billion by year-end, but high-profile failures and rug pulls revealed vulnerabilities in the ecosystem. These events ignited a surge in demand for audits, establishing them as a critical prerequisite for serious projects.
As protocols competed for user trust, the focus of audits expanded. It was no longer enough to assess basic contract security; projects began seeking evaluations of economic manipulation risks, liquidity vulnerabilities, and incentive structures. This rising complexity drove the early evolution of specialized audit firms, which introduced advanced methods like formal verification to mathematically validate contract functionality.
Today, major protocols often undergo multiple audits complemented by ongoing vulnerability monitoring. Platforms like Hypernative are pioneering early risk detection tools, offering continuous oversight. Audit firms and risk analytics providers play a key role in quantifying the quality and reliability of smart contract implementations, enabling users to compare protocols and make informed decisions.
In this evolution, competition for capital and user trust has elevated both security and operational transparency standards. Unaudited smart contracts now struggle to attract capital, and attributes emblematic of DeFi’s early days — such as anonymous founders — are increasingly rare. This shift reflects growing user expectations for accountability and transparency.
Operational Transparency: Beyond Code Security
The demand for transparency extends well beyond code security. Initiatives like proof-of-reserves for custodial platforms and stablecoin audit requirements are becoming industry norms. Users now expect frequent and detailed disclosures on collateralization, governance, and operational practices. Projects that fail to meet these expectations risk losing access to critical capital flows.
Risk analytics providers play a vital role in this shift, enabling participants to assess and compare disclosures. By quantifying the difference between protocols adhering to higher and lower standards, they help direct capital toward safer, more transparent projects, creating a feedback loop that reinforces elevated market practices.
Just as operational transparency has become a benchmark for trust, the tokenization of assets is rapidly shaping new standards that define DeFi’s intersection with traditional finance.
Asset Tokenization: A New Standard
The rapid adoption of asset tokenization is introducing new opportunities — and challenges — in the evolution of DeFi standards. Early implementations have focused on liquid assets like short-term government securities, offering a natural bridge between TradFi and DeFi. However, the diversity of approaches to structuring tokenized assets has revealed significant differences in associated risks. Key variables include legal frameworks, token holder rights, and valuation methodologies.
Tokenized treasury adoption has been a major industry narrative this year, with multiple providers competing for capital. As evidence, the Maker Tokenization Grand Prix attracted over forty applications, showcasing the breadth of implementations. The competitive landscape is quickly driving elevated market standards. Earlier this year, daily net asset value calculations and multi-day settlements were considered industry standard. Today, projects are enabling continuous pricing and 24/7 purchase and redemption capabilities.
Risk analytics providers will play an essential role in quantifying these benefits, helping investors allocate capital to the most secure and efficient instruments. Additionally, these analytics will support the use of tokenized assets as collateral across DeFi, enhancing their integration into the broader ecosystem.
Standardization: A Path to Greater Trust and Adoption
Standardization — the process of formalizing and widely adopting best practices — amplifies the benefits of elevated standards. In DeFi, increasing standardization offers a powerful tool to reduce risks, build trust, and foster the ecosystem’s sustainable growth. By creating consistent, transparent, and collaborative frameworks, the industry can minimize vulnerabilities while advancing innovation.
Credora envisions an ongoing evolution in standards across critical areas of DeFi, each contributing to a safer, more reliable ecosystem:
- Smart Contract Audits: Multiple independent audits and continuous monitoring are becoming standard. Risk analytics providers quantify and benchmark audit quality, helping protocols demonstrate resilience and reliability.
- Oracles: Redundant oracle infrastructure, whether at the protocol or provider level, minimizes risks of data manipulation or outages, bolstering trust in price feeds and real-time inputs.
- Proof of Reserves: Transparent and independently verified proof-of-reserves mechanisms are essential, particularly for custodial platforms and tokenized assets. They provide users with assurances about solvency, reducing counterparty risk and elevating market confidence.
- Legal Infrastructure: Standardizing tokenization frameworks ensures legal clarity, investor protection, and regulatory compliance.
- Governance: Effective governance mechanisms balance efficiency with accountability, reducing operational risks and empowering stakeholders. Transparent decision-making and clearly defined voting rights are essential for creating stakeholder trust.
The Virtuous Cycle of Elevated Standards
Competition for trust and capital has created a virtuous cycle in DeFi: higher standards reduce risks, which builds trust, attracting more participants and capital. This, in turn, incentivizes protocols to innovate and collaborate, further elevating industry benchmarks.
Risk analytics providers are a critical enabler of this cycle. By quantifying differences in standards, they provide allocators with the insights needed to reward protocols that uphold higher benchmarks. Over time, this dynamic drives a self-reinforcing feedback loop, strengthening the ecosystem and laying the foundation for mass adoption.
Credora’s Commitment to Standardization
Credora is deeply invested in fostering higher standards across DeFi, recognizing that collaboration is key to creating a safer, more transparent ecosystem. By providing advanced credit risk analytics, Credora helps increase trust across the industry.
As the industry progresses, collaboration will be key. We invite partners to join us in advancing these efforts, shaping a future where trust, innovation, and reliability define DeFi’s success.
