Strategy 02 · DeFi & Yield
Protocol Diligence
No capital before review. No exception.
Every yield source in this mandate is a piece of software holding other people’s money under rules its authors wrote. The review of that software, its authors and its rules is the strategy’s primary risk control. It is done before deposit, repeated on a schedule, and its output is a limit.
Code
Audit history and the quality of the auditors; whether findings were fixed and re-audited; whether the deployed code matches what was audited; time in production without incident; the scope and payout history of any bug bounty. An unaudited protocol does not receive capital. A protocol whose latest deployment has not been audited is treated as unaudited.
Control
Who can change the protocol, how quickly, and what they can change. Admin keys and their custody arrangements; multisig thresholds and signer identity; time-locks on parameter changes and upgrades; whether governance can be captured by a token holder with a sufficient stake. A protocol whose administrators can drain or repoint funds without delay is a counterparty, and is sized as one.
Dependencies
Which oracles the protocol reads and how they can be manipulated; which other protocols’ tokens it accepts as collateral and what happens if they fail; which chains and bridges it runs across. A protocol is only as sound as the weakest dependency it cannot control.
Economics
Total value locked and how concentrated it is among depositors; how the protocol behaves in a liquidation cascade or a de-peg of a major collateral; whether yield is organic or emission-driven; the incentives of the largest participants. Historical incidents on the protocol and on forks of its code are read as evidence of how it fails.
Limits
The output of the review is not a yes or a no but a number: the maximum exposure the fund will hold in that protocol, and within it per market, per chain and per collateral type. Limits are reviewed when the protocol changes and on a fixed schedule regardless, and are reduced before they are breached rather than after.
Practice
How Wesvel approaches it
- 01A written review covering code, control, dependencies and economics precedes any deposit, and is refreshed on a schedule and on any material change.
- 02Protocols with unrestricted admin control are treated as counterparties and sized under counterparty limits.
- 03Exposure limits are set per protocol, per chain and per collateral type, and are enforced by the systems that deploy capital, not by intention.
- 04Incident response (pause, withdraw, hedge) is written in advance for each protocol in the book.
More in DeFi & Yield
- Lending MarketsThe forms of on-chain lending Wesvel supplies to (pooled, isolated, fixed-rate and curated) and how each fails.
- Structured LoopingBorrowing against yield-bearing collateral and re-supplying it to amplify a spread, and the buffers that keep the loop alive.
- Stablecoin YieldThe sources of yield on dollar-denominated on-chain positions, from lending to Treasury-backed instruments to basis-backed synthetic dollars.
- Liquidity Pool FarmingProviding inventory to automated market makers across full-range, concentrated, incentivized and correlated pools, and the accounting that makes it a strategy.
- RestakingCommitting staked assets to secure additional services for incremental reward, and what changed when slashing went live.
- Finding the OpportunityHow the desk screens lending markets, pools and incentive programs for yield that is mispriced rather than merely high, and what it leaves alone.
- Idle Capital, Instantly AvailableHow uncommitted capital rests in stablecoin-denominated positions that pay while they wait, and can fund a new position within a block when an opportunity prices.
- Stablecoin-Denominated PoolsWhy stable-to-stable pools are the base layer of the DeFi book, how their pricing works, and what a de-peg looks like on-chain before it is one.
- Pool Selection and Range ManagementThe screen a pool passes before capital is deployed, how concentrated ranges are set from realized volatility, and the written rules that govern rebalancing and exit.
- Rotation and Rate MonitoringHow the book moves capital between lending markets, pools and chains as rates change, and the thresholds that stop it from churning.
- On-Chain ExecutionHow positions are entered, rebalanced and exited on-chain: atomic transactions, private routing, slippage limits and the controls around signing.