DeFi instruments composition
At Shift, we don't treat DeFi strategies as a single unit. Every strategy is broken down into its essential components we call Building Blocks. These are:
Asset: the token involved
Protocol: the platform being used
Network: the blockchain where the activity takes place
This bottom-up structure is the foundation of our risk analysis.
Why it matters
Most DeFi strategies span multiple layers. For example, if you provide liquidity to a Uniswap pool on Ethereum, you're interacting with:
The Ethereum network
The Uniswap protocol
The specific tokens in that pool
Each of these layers carries its own risks. A vulnerability in one can compromise the entire strategy. By analyzing each component independently and together, Shift gets a more accurate picture of the full risk surface.
A Building Block is a point of exposure. The more layers, the more potential risk.
Let’s walk through the three types of blocks.
Asset: what you're exposed to
An Asset is any token used in a strategy. It could be a stablecoin, a governance token, collateral, or LP tokens.
Shift evaluates each asset based on:
How it maintains value
What affects its price
How liquid and widely accepted it is
For instance, a token that’s thinly traded or a stablecoin with repeated depegs could pose a serious risk. Even if the protocol is secure and the chain is stable, a weak asset can undermine the whole strategy.
Protocol: the logic behind the platform
A Protocol is the set of smart contracts that define how a DeFi service works. Examples include Uniswap (for trading), Aave (for lending), and others.
We look at:
Protocol design and mechanics
Smart contract security
Economic models and incentives
This helps us understand if a strategy is vulnerable to bugs, exploits, or design flaws, even before factoring in the asset or chain.
Network: the infrastructure layer
The Network is the blockchain the strategy runs on: Ethereum, Solana, BNB Chain, and so on.
We analyze:
Infrastructure reliability
Network security
Validator decentralization
Performance and uptime
Some chains are faster or cheaper, but may be less battle-tested or more centralized. Even if everything else looks good, a weak network can introduce serious risk.
By breaking strategies into these components, Shift can isolate weak points and make risk more measurable.
Example: how one strategy breaks into Building Blocks
Let’s take a practical case: providing liquidity to a Uniswap V3 pool of USDC and DAI on Ethereum. Shift breaks this strategy down into its core Building Blocks:
DAI (Asset)
Even if the user starts with USDC, half of the capital is swapped into DAI to create the pool. Shift treats DAI as a separate risk component, analyzing its stability mechanics—how the peg is maintained, what could cause it to break, and how it's backed. This helps flag potential issues like depegging or changes in its collateral model.
Uniswap V3 (Protocol)
This is the platform used to provide liquidity. Shift reviews how Uniswap V3 works—concentrated liquidity mechanics, impermanent loss risks, fee structures, and any historical incidents or smart contract vulnerabilities. By isolating the protocol, we can understand if the strategy introduces risk through Uniswap’s design or complexity.
Ethereum (Network)
Since the strategy runs on Ethereum, Shift evaluates the blockchain’s security, congestion levels, gas costs, and any recent technical disruptions. While Ethereum is mature, network-level risk (like spikes in gas fees or degraded performance) can directly impact the outcome of the strategy.
Each layer is analyzed on its own terms, and in combination with the others. Risk isn't assessed in bulk. It’s uncovered in detail.
Tracking the “Developer Entity” behind the Building Blocks
In DeFi, it’s common for one team to build multiple components: tokens, protocols, vaults, and more. That’s why Shift also tracks the Developer Entity behind each Building Block.
This matters because different protocols may share the same creator. For example, a lending platform and a governance token might come from one developer team. If that team has internal issues or suffers a failure, it could affect both products.
Shift maps these connections and treats them as correlated risk. If too much exposure concentrates around one developer, the portfolio is adjusted to reduce that dependency.
Diversification only works if the projects are truly independent. Read our article Why diversification in DeFi isn't what you think to learn why assessing the Developer Entity is like mapping the family tree of DeFi.
A team with a strong track record, public transparency, and responsible governance adds confidence across all their products. On the other hand, a history of exploits or shutdowns puts every associated protocol under scrutiny.
This layer of developer-level due diligence adds an important dimension to risk control, and helps Shift avoid hidden concentrations in seemingly diverse portfolios.
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