The Cost of Composability: Reputation Leakage Across Protocols

A protocol's trust score is siloed. Aave's impeccable safety record on Ethereum doesn't follow its deployment to a new L2. This forces users to re-establish trust from zero for each new chain, fragmenting liquidity and security.

• Result: ~$5B+ in TVL locked in isolated, newly-audited deployments.
• Consequence: Users face repeated due diligence for the same protocol on different chains.

When a user interacts with a complex DeFi stack (e.g., Yearn -> Aave -> Curve), the final protocol inherits the weakest security link but gets none of the credit for the stronger ones. This creates systemic opacity.

• Result: Black-box risk in yield aggregators and cross-protocol strategies.
• Consequence: A single exploit in a lesser-known dependency can cascade, tarnishing the reputation of the entire stack (see: Euler Finance hack aftermath).

Critical trust signals—audit history, team credentials, governance participation—live off-chain. This creates information asymmetry and forces reliance on centralized data aggregators like DeFiLlama, which can be gamed.

• Result: $2B+ in exploits from unaudited or poorly verified protocol forks.
• Consequence: The market cannot efficiently price risk, leading to capital misallocation and rug pulls.

A user's impeccable history on Aave is invisible to Compound, forcing them to start from scratch. This creates systemic over-collateralization and wastes billions in locked capital.

• Capital Inefficiency: Users post 120-150% collateral on every new protocol.
• Risk Blindness: Protocols cannot see a user's global debt exposure, leading to contagion risk.

EigenLayer allows ETH stakers to re-stake their security to secure new protocols (AVSs). This creates a portable, cryptoeconomic reputation layer based on slashing risk.

• Security as Reputation: A validator's stake is their bond; misbehavior is penalized across all services.
• Capital Efficiency: ~$20B TVL demonstrates demand for reusable security, a proxy for reusable reputation.

Hyperliquid's L1 exchange uses a unified margin account where trader reputation (P&L, volume) is native to the chain. This enables advanced features like cross-margin and portfolio-level risk management.

• Unified Identity: A trader's entire history and collateral pool is a single on-chain entity.
• Protocol-Native Scoring: Risk engines can directly assess performance, enabling features impossible in fragmented systems.

A validator's past performance in Flashbots auctions or an oracle's reliability on Chainlink is opaque to new protocols. This forces redundant vetting and creates onboarding friction for critical infrastructure providers.

• Information Asymmetry: Protocols cannot discern high-quality operators from bad actors without costly audits.
• Fragmented Vetting: Each new LayerZero or Axelar application must re-establish trust from zero.

Karak extends EigenLayer's model by allowing liquid restaking tokens (LRTs) and diverse assets (e.g., LP positions) to secure networks. This creates a richer, more composable reputation graph based on restaked economic value.

• Asset-Agnostic Security: Reputation is backed by any yield-bearing asset, not just ETH.
• Liquidity Layer: LRTs become a transferable reputation token, enabling new financial primitives.

The endgame is a Sovereign Reputation Graph—a user's consolidated DeFi history as a verifiable, privacy-preserving asset. Think Zero-Knowledge Proofs of solvency and repayment history that can be used permissionlessly.

• ZK-Reputation: Prove creditworthiness without exposing full transaction history.
• Protocol Composability: A single score unlocks undercollateralized borrowing across Aave, Compound, and Morpho.