Risks of DeFi

Remember, the world of cryptocurrency is risky no matter how you look at it, though of course some activities are riskier than others.

There is the general volatility of crypto as a whole, as a young technology in the grand scheme of human economic systems. Here are some risks to be aware of:

  1. Price risk - large drops in price - signaling asset value loss - is clearly a significant risk in DeFi.

  2. Smart contract risk - when there is an exploitable part of the code behind a DeFi application that is open to cyber-attack. This means a malicious actor(s) could come into the protocol and take advantage of the improperly written code to siphon off funds, which might include yours. You should only ever use dApps that are audited. You might have to look at a project’s whitepaper, a written thesis about the product, to determine if a DeFi protocol has been audited, and by whom.

An audit is an independent examination of an individual or organization’s accounts, often including an in-depth financial analysis.
  1. Bridge risk - A crypto bridge connects two blockchains and allows you to send crypto from one blockchain to another. Smaller blockchains with smaller TVL (total value locked) are riskier due to less liquidity.

    Liquidity is how easily a token can be bought, sold, or swapped with another token and is correlated to how much activity/volume there is in a specific blockchain.
TVL stands for total value locked - the total amount of capital that is staked, deposited, lended, and yield farmed through liquidity pools on a blockchain or DeFi protocol.
Make sure you know all of the risks before trading.

Finally, we’ll look at DeFi on NEAR.