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Santiago R Santos
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founder @inversion_cap | posts are not investment advice
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Santiago R Santos
04-10
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DeFi has lost between $730M and $3.1B to exploits every single year since 2021. TVL has swung from $175B peak to $45B trough and back above $100B. The loss rate as a % of TVL is 1–3% / year depending on the cycle. I've been thinking about a simple metric to price this risk: the DeFi Security Premium Ratio (DSRP). DSPR = Security Spend / TVL. Reported quarterly. Both sides verifiable on-chain. Five tiers: Hardened (>1%) / Protected (0.5–1%) / Baseline (0.2–0.5%) / Underspending (0.05–0.2%) / Exposed (<0.05%) DSPR acts as a yield pricing input. Low DSPR = higher required yield to compensate LP for security risk. High DSPR = protocol earns a lower cost of capital. We need a ratings mechanism on chain to price yield Any protocol that is underspending in security needs to be called out and either spend more, divert more fees to an insurance fund, or both @Blockworks you should add it to the token transparency portal. but now do one for protocol health L1s should also carve out % of validator rewards or fees to DeFi protocols taking security seriously Need to think more about how to verify and create manipulation-resistant security spend receipts @_SEAL_Org - any ideas?
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Santiago R Santos
04-09
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Back in peak DeFi farming days you’d think about APY as how many days it would take to recoup principal with the yield. That’s how risky it felt and that same rigor should be applied when thinking about interacting onchain today. Yes, not all farms/vaults are created equal. Not all strategies carry the same risk. But you have to factor in the nonzero chance of total or meaningful principal loss. I get asked constantly what is enough yield to come onchain. I think it’s at least 18% today. Anything below that is not worth the hassle or the risk. I won’t do formal math but here is my mental model: smart contract risk + opsec risk (yours) + opsec risk (any protocol you’re interacting with). These are ever-evolving risks. The more protocols you interact with the more risk blows out exponentially. There are also things you can’t control. Anthropic’s latest model just found vulnerabilities in codebases from some of the most resourced and established companies in the world. If you think DeFi protocols (written faster and audited lighter) are a harder target, think again. I say this as a DeFi bull. Onchain rates are low because there is no demand for assets. That is not the same as risk being priced correctly. What’s the solution? Demand higher yield onchain. And we desperately need better insurance products at the point of sale. I talked about it today on @theempirepod roundup coming out tomorrow
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