How to Review DeFi Protocols Using ChatGPT
Quick personal note: Last week was a whirlwind – celebrated another trip around the sun (🎂), juggled a busy schedule, and wound up trading my usual Sunday post for a Monday evening special. Sometimes life happens, right? But hey, we're here now with a guide that I think you'll find worth the wait!
Why This Guide Matters
💸 Over $4 billion was lost to DeFi hacks and scams in 2023
🔍 Traditional due diligence tools often fall short in the DeFi space
🤖 AI tools like ChatGPT can help bridge the knowledge gap
🎯 Learn to spot red flags before committing your funds
Decentralised Finance (DeFi) has grown rapidly, offering everything from lending and borrowing to yield farming and staking—all without the need for traditional banks. But with so many DeFi protocols emerging, how can you tell if a project is safe, reliable, and worth your time?
The good news is, you don’t need to be a technical expert or know how to code to get insights. With ChatGPT, you can review a DeFi protocol effectively and understand key features like security, tokenomics, and governance. In this article, we’ll guide you through how to use ChatGPT to analyse DeFi projects, providing easy prompts, tips, and tools to aid your research.
What is a DeFi Protocol and Why Should You Review It?
What is a DeFi Protocol?
A DeFi protocol is essentially a decentralised application (dApp) that offers financial services without traditional intermediaries like banks. These protocols run on smart contracts, which are self-executing agreements coded on blockchain networks like Ethereum. These protocols offer financial services like:
Trading (e.g., Uniswap)
Lending and borrowing (e.g., Aave)
Yield generation (e.g., Yearn Finance)
Derivatives (e.g., GMX)
Why Review a DeFi Protocol?
Before you invest your hard-earned crypto into a DeFi protocol, it’s crucial to review it. Why? DeFi is still relatively new, and there have been cases of hacks, rug pulls (where project creators suddenly disappear with funds), and poorly designed contracts that lead to major losses. With over $50 billion locked in DeFi protocols and new projects launching daily, how do you separate the wheat from the chaff? Enter ChatGPT – your AI-powered research assistant for DeFi analysis.
How ChatGPT Can Help with DeFi Research
ChatGPT can assist you in various ways when reviewing DeFi protocols, even if you're just starting out. You can use it to:
Decode complex protocol whitepapers into plain English
Understand key features like tokenomics and governance and identify potential vulnerabilities
Evaluate security measures by analyzing audit reports or checking for multi-signature wallets.
Analyse smart contracts if you're more technically inclined.
Compare protocols across key metrics
The best part? You can do all of this with the free version of ChatGPT, without needing coding skills or technical tools.
Step-by-Step Guide for Newbies: Reviewing a DeFi Protocol with ChatGPT
Step 1: Understanding the Protocol’s Basics
The first step in reviewing any DeFi protocol is understanding what it does. Start by looking at the protocol’s website, whitepaper, or a third-party platform like DeFiLlama or CoinGecko. These sources provide basic information like Total Value Locked (TVL), supported assets, and the protocol's main services.
Example prompt for ChatGPT:
"Explain the basics of [DeFi Protocol] based on its whitepaper, including its main purpose and features."You can simply paste this prompt into ChatGPT, and it will summarize the protocol for you. This is especially helpful if you find whitepapers too technical or overwhelming.
Tip for newbies: If a specific term (like ‘liquidity mining’) confuses you, just ask ChatGPT to explain it in simpler terms.
Step 2: Evaluating Tokenomics
The next step is to understand the protocol’s tokenomics—how its native token works, what it’s used for, and how it's distributed. Some protocols may use their tokens for governance (voting on proposals), while others might reward users for staking or providing liquidity.
Example prompt for token distribution:
"Break down [Protocol]'s token distribution:
1. Initial allocation
2. Vesting schedules
3. Team/investor lockups
4. Emission schedule"ChatGPT can help you break down complex tokenomics into something easier to digest. You can also cross-reference this information on CoinGecko or CoinMarketCap to get a real-time overview of token performance, supply, and distribution.
Example prompt for token utility:
"What gives [Protocol]'s token value? Analyse:
1. Governance rights
2. Revenue sharing
3. Staking benefits
4. Protocol-specific utility"Step 3: Assessing Governance
A truly decentralised protocol will often have a governance model in place, meaning users can vote on key decisions by holding governance tokens. It’s important to check how decentralised the decision-making process is and who holds the majority of tokens (a few large holders could influence outcomes).
Example prompt:
"How does governance work in [DeFi Protocol]? Who can vote and how are decisions made?"For governance, look for community forums or governance platforms like Snapshot where proposals and votes are recorded.
Intermediate Guide: Deeper Research with ChatGPT
Once you’ve understood the basics, you can move on to deeper research. This section is aimed at users who are comfortable looking into the protocol's security features and code, even if they aren’t experts.
Step 4: Checking for Security Features
Security is one of the most critical factors when reviewing a DeFi protocol. Look for multi-signature (multisig) wallets, which require multiple parties to approve a transaction, or external audits that highlight any vulnerabilities in the smart contract.
Example Prompt:
"What security measures does [DeFi Protocol] have in place, such as multi-signature wallets, audits, or bug bounties?"You can usually find security details on the protocol’s website or in a blog post. ChatGPT can summarise these for you, so you can focus on the key points.
Step 5: Analysing Audits
Audits from firms like Certik or OpenZeppelin are often a good indicator of a protocol’s security. However, they’re not a guarantee—just because a protocol is audited doesn’t mean it’s immune to attacks. Reviewing an audit can help you understand any potential weaknesses in the system.
Example prompt:
"Has [DeFi Protocol] been audited? If yes, summarise the key findings of its audit:
1. Critical vulnerabilities
2. Medium/low risks
3. Auditor recommendations
4. Team's response to findings"If the protocol has published an audit, ChatGPT can help by summarising the findings, including any vulnerabilities that were discovered and how team dealt with those findings.
Step 6: Understanding Multisig Wallets
Multi-signature wallets require multiple people to sign off on a transaction, making it harder for a single person or entity to run away with funds. If a protocol uses multisig wallets, it adds an extra layer of security.
Example Prompt:
""Explain how multi-signature wallets are used in [DeFi Protocol] and why they matter for security. Analyse [Protocol]'s multi-sig implementation:
1. Number of signers
2. Signer identities
3. Required signatures
4. Time locks"By understanding multisig setups, you can gauge whether a protocol has taken proper measures to safeguard user funds. A red flag would be having a multi-sig wallet with 10 signatories but only 3 signatures needed to move protocol funds.
Going Further: Reviewing Smart Contracts and Code
For more technically inclined users, you can dive into the actual code of the protocol, especially if the project is open-source. While this is more advanced, ChatGPT can still help you make sense of the code.
Step 7: Analysing the Code (intermediate users)
Smart contracts are the backbone of any DeFi protocol. If you're comfortable with programming languages like Solidity, you can use ChatGPT to help review sections of the code.
Example prompt:
"Can you explain this Solidity code from [DeFi Protocol]'s smart contract and point out any potential security concerns?"
or:
"Review this smart contract snippet from [Protocol]:
[paste code]
Identify:
1. Potential vulnerabilities
2. Gas optimization issues
3. Best practices violations"You can paste snippets of the code into ChatGPT, and while it won’t replace a professional audit, it can help clarify what the code is supposed to do.
Step 8: Checking Wallets and On-Chain Data
If you're interested in tracking wallet activity for the protocol (e.g., developer funds, team wallets), you can use tools like Etherscan. This is especially useful for spotting unusual activity, like large withdrawals that could signal a rug pull.
Monitor these key metrics:
TVL Trends
Growth patterns
Concentration risks
Whale movements
User Activity
Unique addresses
Transaction volume
User retention
Example prompt:
"Explain how I can track developer wallets for [DeFi Protocol] and monitor unusual activity."ChatGPT can guide you through how to track on-chain data, so you can keep an eye on the movement of funds. For a seasoned DeFi user you can always use API to connect ChatGPT to various platforms but you will need to pay for this functionality. To do this using free version, just paste a screenshot, a link, or copy and paste information and ChatGPT will take it from there. If ever in doubt, ask GPT itself how to mitigate whatever issue you found or difficulty you may encounter.
Tools and Platforms to Aid Your Research
Here are a few platforms you can use alongside ChatGPT to gather information:
DeFiLlama: TVL (Total Value Locked), liquidity data, and comparisons between protocols.
CoinGecko: Tokenomics, price data, and market cap rankings.
Etherscan: Blockchain explorer to track wallet activity and transactions.
GitHub: Access open-source code for smart contracts.
Audit Sites: Look for audits from Certik, OpenZeppelin, or Trail of Bits for a security overview.
Best Practices When Reviewing a DeFi Protocol
Be wary of hype: Always cross-check information, especially when social media hype surrounds a protocol. Hype doesn’t equal safety.
Check for recent code audits: Make sure the protocol has undergone an audit and that it’s up-to-date. Older audits may not reflect the current state of the protocol.
Governance transparency: Protocols with decentralised governance often have more transparency and user input.
Multiple sources: Always diversify your research by checking multiple platforms and resources.
Red Flags Checklist
🚩 Immediate warning signs:
Anonymous team without valid reasons
Unaudited smart contracts
Excessive token allocation to team/investors
Limited GitHub activity
Closed source code
Unrealistic APY promises
Using ChatGPT to review a DeFi protocol simplifies what can often feel like an overwhelming process. Whether you're analysing the basics like tokenomics or diving deeper into security audits and smart contracts, ChatGPT can assist you at every stage. While it doesn’t replace professional audits, it’s a valuable tool in your research arsenal.
Start small, ask the right questions, and as your understanding grows, so will your confidence in navigating the world of DeFi with the help of ChatGPT.
Final Tip: Always remember that while ChatGPT and other tools can provide useful information, it's important to never rely solely on one source when making investment decisions. Stay cautious, stay informed, and happy researching!