Decentralized Finance (DeFi) comes with a risk.

Decentralized Finance (DeFi) comes with a risk.

Decentralized Finance (a.k.a DeFi), as its name implies, is the financial system in which you do not require a centralized authority to govern it. The system itself is capable of doing the exchange or swap of tokens, distributing the fees to the participants(Liquidity providers) of the system, providing the yield/interest to its participants and can be used even for borrowing and lending the assets and all of this can be done, without any human intervention.

Source

Since there is no central authority in the DeFi financial system, and system is providing the services then how it is possible? It is all possible due to the "Smart Contracts" which are the programs that execute automatically when the triggering conditions are met. So in short, you can say that DeFi is "program-based" financial system.

Now, it seems that a program-based system will be more robust and might be the smart choice to use it, then let me warn you that DeFi also come with risk or very huge risks, depending upon the platform.

Defi Risks

1. Smart Contract.

Are you wondering how something that is the backbone of the system is the biggest risk to the system? It is because if a developer has deployed some malicious code along with the required code.
Also, since it is code that is governing the whole financial system, so malicious hacker will try to find loopholes in the system to exploit it.

So DeFi platform has risk from both the malicious intent of developers as well as from hackers.

2. Anonymous ,regulations and support.

These platform might be deployed by an anonymous entity and there is no idea if the platform will be following regulatory and the compliance requirement. If it is an anonymous platform then I guess you will hardly get any support or answers to your queries.

3. Participants can face impermanent loss.

To make the system work, someone is to provide the liquidity to the system, Liquidity providers (or participants) are incentivized by providing some "yeild" farming, or getting a cut of the fees generated by the platform or both. Since you are earning then it means, your value wil keep on increasing but it is not the actual case. Dut to the volatility of the prices and change of the price ration of assets in respect to one another that are in DeFi pool, you might face an impermanent loss where your overall value of assets get decreased by participating in Defi if compared to the funds that are kept on your wallet.

4. Users can face a front-running attack.

Since Defi transaction happens on Blockchain, so they are visible to everyone (unless it is masked by using specific protocols) so a bot will try to frontrun your transactions to generate the profits for them based on your transaction.

5. You are not in full "control" of your funds.

We already know that "Not your keys, Not your money", same goes with Defi where your all transaction satisfy that smart contract. Just wonder if a malicious smart contract , does not allow you to withdraw your own money?

6. DEX are also get hacked exploited as CEX.

It is not like we discussed the theoretical possibilities on the above points. It all happened and can happen again. DeFi/DEX platforms were exploited and hacked on numerous occasions on the past.

Does it mean that you should switch to CEX/Centralized Finance?

I think all above limitations exist for CEX/Centralized Finance, where you are not in control of your funds, CEX can also be hacked and top of it you need to do KYC and your personal data also can be leaked from there. As far as we are concerned with front-running bots in Defi , bots exists in the CEX also.

My 2 cents.

I will say that our first priority is to keep our funds safe, so do not risk your funds that you cannot afford to lose. If you earn while having full control of your funds, then definitely look in that direction also, For me Hive staking works and HBD interest is a good way to earn.
If you have to buy some token or sell some token that have significant value, I will say go for the trusted and audited platform, buzzwords like rewards, yields, and high APRs should not change your decision to take a "high" risk on the funds that is very hard to lose for you.

Please ,do perform DYOR and do not blindly trust anything.

Posted Using INLEO