Any transactions that are made on Ethereum's base layer are recorded on the blockchain for all to see. This is a property of blockchains that many people misunderstand. Cryptocurrencies are pseudonymous, rather than anonymous.
This means an outsider looking at the blockchain may not be able to determine the identity of a person who owns a specific address. However, if you pay someone from an address or receive funds from someone, that person knows who you are and can "follow the trail" of tokens using tools such as Etherscan.
It's not just Ethereum that can be traced in this way; Bitcoin has its own block explorer. Moreover, tokens that operate on top of Ethereum can be tracked too, although scaling solutions such as Arbitrum can make it harder to trace some transactions. Similarly, dashboards such as Dune.com offer detailed insights into a variety of aspects of the DeFi marketplace, helping investors, traders, and protocol developers make better decisions.
Applications for Tracing Blockchain Transactions in DeFi#
Having the ability to search and analyze transactions on the blockchain is useful for many reasons. For example, law enforcement agencies use Chanalysis, a blockchain data analysis tool, to tackle fraud and scams.
Let’s see some of the usefulness of tracing transactions in DeFi.
Managing Identities on the Blockchain#
Some businesses are using KILT or Polkadot to create reusable digital credentials on the blockchain. This allows users to identify themselves with their digital wallets and could streamline the end-user experience for DeFi and DeFi insurance.
The digital credentials issued on KILT will be reusable, and consumers will have control over what details they share with each organization. This makes KILT a more appealing option than traditional KYC/KYB systems. Unlike those systems, KILT removes the need to share personal data with each company they want to interact with. This not only reduces the risk of identity theft and fraud but also saves time on sign-up processes.
Visualizing Activity across Different Protocols#
For traders to be able to make good decisions, they need information about what's going on in each marketplace. Blockchain explorers and visualization tools are invaluable for this. At Neptune Mutual, we offer a search feature that lets users see cover purchases and which protocols they relate to. Similarly, Dune offers graphs and charts highlighting certain types of transactions, such as claims on specific DeFi insurance protocols.
There are even tools that cast a wider net, covering more than just Ethereum and ERC-20 tokens. For example, the DeFiSafety project covers 19 different protocols and assesses DeFi platforms. It takes account of various metrics such as liquidity, smart contracts, and oracles, as well as more subjective measures such as the quality of documentation.
This information is incredibly useful for anyone who is interested in trading or investing in DeFi. However, since so many projects are out there, it's not possible for any one person to truly do due diligence on them all. But looking at aggregated metrics can give people a better understanding of the size, popularity, and potential viability of a project.
In addition, tools such as DeFiSafety have made it easy for non-technical traders and investors to get an at-a-glance overview of the "quality" of a project. This has raised the bar for what project developers need to be showing when trying to attract users.
How Secure Is Your DeFi Project?#
Of course, liquidity is an important thing to consider in a DeFi project. Besides, security is also a major concern, knowing that millions are locked up in smart contracts. But it isn't worth much if you can't read that smart contract to tell how secure it actually is.
Understanding smart contracts isn't easy. Even some of the most experienced Ethereum developers have been caught by phishing attacks and malicious websites asking them to connect their Metamask wallets. With such large-scale attacks going on, it makes sense for end-users to do as much research as they can to protect themselves. DeFi projects owe it to their users to make their platforms as robust as possible, too.
According to one recent survey, more than 75% of global institutions anticipate a successful cyberattack within the next year. Crypto projects are particularly attractive targets for cyberattackers because of the digital and pseudonymous nature of the blockchain. Smaller DeFi projects face higher risks of being hacked due to limited code auditing and research compared to larger, well-audited projects.
DeFi Insurance for Coverage against Hacks#
That's where DeFi insurance protocols come in. Projects are looking to protect their users’ assets by creating covers in DeFi insurance pools to let individuals purchase their own covers. This ensures proper compensation for the cover purchasers from DeFi insurance protocols in case a covered project is hacked or a bug locks up funds in a smart contract.
Neptune Mutual's cover pools offer transparent, quick, and secure access to DeFi insurance. The pools operate on Ethereum's base layer and Arbitrum, and you can see the locked amounts in the pools by yourself.
The parametric nature of the pools guarantees quick payouts and removes unfair denials of claims. In addition, the voting system for incident reporting ensures participation, fairness, and consistency in incident resolution.
If you're a DeFi project developer or a user interested in either purchasing cover or receiving yield by investing in our cover pools, take a look at our app today. Alternatively, contact us to talk to one of our team members who can explain our parametric insurance and help you understand your options.
