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The risks of DeFi and the key to removing them

Cryptocurrency Jan 18, 2022 03:30AM ET
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The risks of DeFi and the key to removing them

The decentralized finance (DeFi) sector of the cryptocurrency industry has been around for years, but for a long time, it didn’t receive too much attention. It consisted of small projects that were mostly ignored, as crypto users pursued trading and investing for the sake of HODLing alone, potentially not even being aware of the possibility of making passive income.

DeFi only blew up in 2020, when the COVID-19 pandemic caused a global economic meltdown, causing people to look for alternative sources of income. Many who were not into the crypto industry started getting involved, and those within it started looking into new aspects of earning from digital coins — preferably those that involved reduced risk and the possibility to keep their coins and use them to earn new ones.

As a result, decentralized banking blew up, allowing users to stake their tokens, engage in decentralized lending and borrowing, and earn in a variety of different ways. But, for all the benefits that DeFi offers, it is still very much new, and experimental. This is no secret, and new improvements for even the best projects are being invented all the time.

But, some risks cannot be fixed by patches and coding, and today, we are here to talk about those.

The risks of DeFi
Obviously, one of the biggest problems with DeFi is that it still relies on cryptocurrencies, which are highly volatile. This volatility is the real problem, as prices can go up and down unexpectedly, and cause you to experience losses if you decide to sell after investing at a higher price.

Speaking on crypto price fluctuations affecting DeFi, EQIFi CEO Brad Yasar commented that “as the user base increases, volatility will decrease as the crypto space becomes more robust and less susceptible to superficial influences like celebrity tweets and rumors. Make no mistake, price fluctuations will impact DeFi, but this impact will lessen as adoption increases.”

Then, we have software risks that can be fixed, but that depends on identifying them in time, and fixing them before bad actors can find them, which doesn’t always happen in that order. DeFi has seen plenty of losses due to exploits, and in some cases, hackers were just trying to teach projects a lesson in how vulnerable their systems were, and they even returned the money after making their point. However, there were also cases of pure greed, where the hackers were in it for the money, and those coins are usually never seen again.

Another type of risk is encountered when it comes to lending and borrowing, and this is known as the counterparty risk. Essentially, you may choose to lend your money to someone, and they simply don’t pay it back. Now, DeFi has found a way to protect lenders from this by requiring collateral, and in some cases, borrowers are even required to over-collateralize the loans they take out. However, there are also under-collateralized loans, as well as those with no collateral required, which are the riskiest of all.

Another problem lies with the gas fees. These days, DeFi is present on pretty much every blockchain that can act as a development platform, but the oldest and largest DeFi protocols are still on Ethereum. The problem here lies with Ethereum’s inability to scale, which results in massive gas fees that users tend to pay in order to have their transactions processed ahead of time.

The larger the fee you pay, the quicker your transaction gets picked, and that often means paying fees that could potentially be larger than the amount of money that you are transacting, which defeats the entire purpose of using blockchain in the first place.

What’s the solution?
Currently, the biggest risk in the DeFi sector lies in the fact that the sector is completely unregulated. There is almost no government oversight or regulation from any government entity, agency, or group. In other words, you are on your own.

This needs to change in order for DeFi to advance and reach its full potential. Now, since DeFi is not regulated on its own, you can do one of two things — wait for the regulations to come (which might take years), or choose to take your business to a regulated entity that deals in DeFi.

The second option feels a lot more practical at this time, and if you wish to try that, we can recommend EQIFI.

What is EQIFI?
EQIFI is the first DeFi platform in the world powered by a regulated global bank. The platform offers activities like yield farming, where you stand to earn up to 70% APY by using the EQIFI Yield Aggregator.

EQIFI also offers the ability to borrow assets using your idle tokens as collateral. You can get your loans instantly, as soon as you deposit your crypto, and it even lets you choose between a fixed rate and term, or a variable one.

You can also invest in any way you want using Interest Rate Swaps, which let you take control of your finances and allow the exchange of a variable interest rate for a fixed rate to reduce or increase exposure to fluctuations in interest rates.

EQIFI offers a lot more, and if you are looking to engage with the DeFi sector in the safest way possible, we recommend researching the platform, its features, offers, and the potential to earn, as it is currently the best option for profiting from DeFi that we could find.

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The risks of DeFi and the key to removing them
 

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