DEFI has opened up a whole new world of financial services that are much easier to access, more transparent and give the user greater control. But against these benefits, you have to weigh the risks of transacting in a totally unregulated space with immature technology and business models that aren’t fully stress tested.
So before using DEFI lending or borrowing services here are a few things to consider:
The impact of market volatility
Crypto trades 24/7 and prices are notoriously volatile. By locking up your funds as collateral for a loan you are at the mercy of the markets which can quickly push your collateral below the required LTV ratio and liquidate them.
Smart Contract Audits
When using DEFI you aren’t dealing with people or relying on the reputation of an institution, you are simply interacting with computer code. That code will execute whatever conditions are programmed into it.
To minimise the risk of Smart Contract flaws reputable DEFI protocols will have them independently audited. An audit doesn’t on its own guarantee a Smart Contract won’t be exploited, but it does mitigate some of the risk.
Is the risk justified?
Using DEFI borrowing and lending services is a risk-reward trade-off. Make sure you fully understand the risks and where the rewards seem too good to be true, they probably are.
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