How does Yield App conduct its due diligence?
- Due diligence allows decision makers to weigh up the costs, benefits and risks associated with any decision
- Due diligence is a knowledge-intensive and time consuming process which can be difficult to perform for individuals
- Digital asset platforms like Yield App conduct due diligence on your behalf, making digital assets more accessible to everyone
- Yield App’s due diligence process combines in-depth research and risk mitigation by our decentralized finance (DeFi) team with external audits and ongoing third-party monitoring and risk assessment
- Yield App will never compromise security for the sake of higher returns
Due diligence is a key aspect of any serious investment strategy and is especially important in the digital asset space, where formal regulatory frameworks still lag the traditional finance world. As we've mentioned in previous blogs, a solid due diligence process is critical to ensuring your digital assets remain safe and protected from risk.
At Yield App, we take our fiduciary duty to our clients seriously and have therefore implemented the most rigorous due diligence procedures as part of our overall investment process.
What is due diligence?
Due diligence is the investigation or care expected of a sensible business before entering into an agreement or contract with another party or taking an action with a certain standard of care. The theory behind due diligence is that conducting this type of investigation contributes significantly to informed decision making by improving the amount and quality of information available to decision makers and ensuring that this information is used systematically to think about the decision at hand and all of the costs, benefits and risks associated with it.
In 1933, due diligence became a specialized legal term in the United States when it comes to the purchase of securities. In the context of digital assets, due diligence is referred to as the voluntary act of research, before investing into or interacting with assets on the blockchain. While conducting this research, an investor should look into the legitimacy of a project and its team and also take risks into consideration that are unique in the digital assets space, such as for example self-custody risks, the risk of managing one’s own assets and smart contract failure.
Due diligence is an important part of the process for any type of investment. The first step should be to verify that a project or platform has been audited by a trusted and experienced third party. The auditor will examine the security risks of the project and should give a good indication of whether a project takes security seriously. Of course, this does not absolve you from the risks of self-custody if you choose to hold your digital assets yourself.
How does Yield App conduct its due diligence?
As mentioned earlier, the challenge in conducting due diligence is to improve the amount and quality of information that is available to the decision maker. It is natural that a platform should have the resources available for this process that an individual does not.
At Yield App, our due diligence process is a combination of in-depth research and risk mitigation by our decentralized finance (DeFi) team, as well as external audits and ongoing third-party monitoring and risk assessment.
To achieve this, our DeFi team employs a five-pillar approach to risk management which combines risk mitigation, social intelligence and analytics and smart contract auditing with full technical and business due diligence. The strategy plots and scores dozens of key data risk points, taking into account:
- Smart contract risk
- Platform risk
- Counterparty risk
- Market risk
- Credit risk
For example, to hedge against smart contract risk, Yield App uses an internal proprietary risk model that focuses on four pillars of security. This model uses a sum of 135 measured variables compiled from historical data to analyze all aspects of market exposure and ensure our balance sheet reserves outperform our customer liabilities over the short, medium and longer term.
The data risk points are our internal benchmark and are continuously regression tested. This data helps our portfolio managers to ensure that all protocols and pools meet our extremely thorough security and alpha generation thresholds. Before any deployment is hard coded into our portfolio management system, it must first be approved by the investment committee.
Our due diligence doesn't stop there. Our DeFi team uses an automated tool to capture and analyze social media and news sentiment to stay ahead of the curve. Compiling this carefully curated information has improved operational agility by predicting market saturation metrics, compensation decay, governance proposals and more well in advance.
We only deploy assets into protocols that have proven their worth over time. Without exception, these are subjected to comprehensive due diligence. In doing so, we ensure that our portfolio strategy remains highly diversified at all times to minimize potential unexpected losses.
Further, Yield App leverages the power of cryptography to expand the amount of data available to us across organizations. This technology is called Multi-Party Computation (MPC). MPC is a tool that allows multiple parties to perform calculations on their shared data without revealing their individual inputs.
Third party due diligence
In addition, our due diligence is not limited to our comprehensive internal methods. We have engaged Kroll (a Duff & Phelps company) and PerForm Due Diligence (a JTC company) to provide risk, governance and continuous monitoring services on our behalf. We are very pleased to have their extensive experience to help us continue to build our portfolio management capabilities.
The transparent nature of public ledger technology is the foundation for the trustless and permissionless world of digital assets. However, when users choose a custodial service like Yield App, the platform must provide sufficient transparency to assure its customers that it has a sufficient balance sheet to actually cover its liabilities.
This transparency can be provided through a proof of reserves audit, an independent audit of a company’s balance sheet conducted by a third party. Earlier this year, Yield App partnered with Armanino LLP to provide such an audit to our clients. The first report was completed on 24 January 2022, using a point-in-time methodology, and can be read here.
Our partners offer proof and confidence in our own internal systems for both our community and ourselves. Due diligence by industry experts helps us verify our rigorous, industry-leading standards while ensuring the highest level of transparency for our customers.
Custodians of your assets
Every user of digital assets must make the decision whether to hold them in custody themselves or to use a custodian service such as a central exchange or a digital asset platform. Clearly, conducting due diligence is a time-consuming and complicated matter. It requires expert knowledge, and even our experienced team benefits from third parties to complement our efforts. In addition to the research that should be done on any project with which the user interacts, there is an inherent risk of loss of private keys or hacks for those who self-custody their digital assets.
Our goal is to make digital assets as accessible as possible. That's why we perform the most rigorous and externally stress-tested due diligence on our platform. We do all the due diligence for you so you know your digital assets are safe. Using a secure digital asset platform also has the advantage of eliminating the need for hardware wallets or digital asset insurance providers for both individual investors and large institutions.
Thanks to Yield App's sophisticated systems, you can sleep soundly knowing that your assets are only deployed in top-notch protocols or entrusted to third-party managers who have gone through our rigorous due diligence process. Our team is experienced, diligent and operates according to industry-leading standards.
We believe that due diligence and risk assessment are key pillars of any investment strategy, and we will never compromise safety for the sake of higher returns. We are proud to offer our customers one of the safest one-step solutions for digital assets on the market.