How to Effectively Manage DeFi Risk


Even though decentralized finance (DeFi) is on the right track in terms of growth and adoption, the space is still full of risk, uncertainty, and volatility. One of its main advantages over centralized finance is the availability and accessibility of financial data. Since transactions are public, blockchain offers a unique opportunity to understand market sentiment through data analysis.

This innovative perspective is known as on-chain analysis. Simply put, it is the practice of analyzing the fundamentals, utility, and transaction activity of a cryptocurrency and related blockchains in order to predict future price action and a plus. wide range of market measures.

Iakov Levin is the founder and CEO of Midas.Investments, a CeDeFi (centralized decentralized finance) crypto investment platform.

On-chain analysis provides a view of the digital financial system for better decision-making and helps answer critical questions: Who owns the majority of the assets? Are holders of a specific token sitting on profits?

Why do we need on-chain analysis?

Any form of investing requires careful analysis of market sentiment and capital positions. There is always a challenge in traditional business analysis because market data is not always transparent.

On the other hand, the transparent nature of DeFi means that there is a lot of data accessible. However, for this data to be actionable, it must be refined, organized and transformed into understandable information.

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The chain analysis approach fills this gap. It creates an effective practice for measuring the data and metrics needed and potentially simplifying complex investment decisions.

Additionally, it can be a powerful practice for identifying protocols with high liquidity and security risks. We are only in the early stages of on-chain analysis. However, the emergence of more innovative data brokers and analytics solutions could see next-generation on-chain analytics bring more comprehensive visibility across the entire DeFi industry.

The negative side of on-chain analysis

It is important to remember that we should not rely solely on on-chain analyses. More often than not, it does not provide a complete picture of market transactions where we see the skeleton data of transactions without understanding their context. There is a risk of not seeing the big picture regarding what is driving current market sentiment – ​​and how long it could be sustained.

Crypto and DeFi spaces are highly strategic. Recently, we have seen tweets or announcements from influential public figures significantly pumping specific tokens past their projected value, and small changes in regulation completely decimate a token’s price floor. These prospects are relatively frequent in the DeFi space, which cannot be predicted by on-chain analysis.

Focusing too granularly on micro details can lead to the loss of the larger strategic narrative. While these analytics effectively provide essential information about each transaction, they cannot provide broader context by linking each activity across the blockchain.

Yet, these pitfalls of on-chain analysis may be solved in the future when we see more and more portfolios being tagged on exchanges, allowing investment decisions to be made in a much more balanced and efficient way.

How to effectively use chain analysis

The most critical on-chain measures that investors tend to rely on are liquidity indicators and their variations over time. On-chain analysis seeks to provide insight into how liquidity spreads from one protocol to another over time. For example, if a network is experiencing high liquidity, it can be predicted that certain protocols and associated tokens will lose value.

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There are several different analytical tools suitable for different levels of investors. The most basic is Nansen, which allows users to dig deeper into what happens in wallet addresses through the blockchain. Nansen helps identify token flows between major players, where money is moved and deposited, which non-fungible tokens (NFTs) are positioned for higher prices, and more.

So there is Dunes dashboard, where users (usually advanced traders) can write SQL queries to identify and track required metrics and convert them into comprehensive visual charts. There are also other popular tools tailored to specific blockchains, such as Etherscan, Santiment, and Messari.

The intense demand for on-chain analysis and its future

On-chain analysis has become a powerful tool over the past few years, especially for investment firms and venture capital funds. Many have built their own advanced chain analysis systems to identify deeper metrics and effectively manage their clients’ risk positions. Several startups have also entered the blockchain data analytics market, working as data brokers and providing actionable blockchain analytics data to top venture capitalists (VCs) and investors.

The future of on-chain analysis looks bright. This intense demand for on-chain analytics will continue to grow as Web3 services are expected to grow by 700% over the next five years. As more VCs and hedge funds use these analytics to make sustainable decisions and as more data brokers enter this space, the current challenges of on-chain analytics will be addressed through the innovation.


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