Some Risk involved in DeFi
Technical Risks:
This arises from issues with protocols, hardware, and software. This kind of risk depends on some factors like race conditions, API, use cases and exception handling, and memory safety. Race condition generally results in making the sequence responsible for the outcome of an event unreachable.
Memory safety risks causes memory interruptions, access errors, uninitialized variables, and memory risks. Lack of proper testing can also hamper in operation.Financial Risks:
The decentralized blockchain has to be made with expert so that its users don’t incur much loss. Good knowledge on the financial tool by the DeFi developers is needed as we know its not a joke at all. In case of traditional financial market, or government financial system, experts are working continuously for the system. But here a decentralized system is being developed on which basis the trade/ transection will happen. So, its needs to be well analyzed. If it is not then risk is always associated.Volatility in Price: It’s a common nature in the crypto market where we can experience 50% price change over week. This risk is involved here. Gain today may be loss tomorrow.
Liquidity Risk: As the liquidity is less in DeFi than it can lead extra transection fee in the system.
Smart Contract Risk: Smart contract is based on preset code. If there were any minor error in the code, then customers can lose their fund because there is not central authority to give back the fund.
Scalability Risk: In blockchain the transection per second is preset. So, adopting with technology and update its problematic.
Insurance Risk: Fault or mistake by any parties can lead in fund loss. When fund is lost its lost forever as its not insured.
Source: Image by Gino Crescoli from Pixabay
Advantages & Disadvantages of Yield Farming
Advantages:
Passive Earning: The main objective of yield farming is the passive earning. Those who have some stake of coin, can get the benefit of staking and earning passive income without any work. They need to invest in liquidity pool, that’s it. Thus, will get annual return.
High Profit: Profitability is very high compared with any of the traditional investment alternatives. Sometimes we can see 50% APY which is the dream of real-life business or finance system.
Open for all to participate: Anyone can participate with any possible amount. Its not restricted for any user.
Can be compared with profitability: What is the return on any specific pool is given in the table. So, it’s easy to compare with other coins and traditional financing system yields.
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Disadvantages:
Price volatility: The asset will be locked in the liquidity pool. In the meantime, price of that coin can be reduced in the market. So, it will incur more loss at the end of the year if cann’t be sold while price changing. Price volatility can affect in such many ways.
Ether Deposit: When we think about depositing ETH to the wallet, then its about withdraw gas fee. So, cost is not less in this case although swap gas fee is less.
Smart Contract: For any smart contract, if the node is not correct then it can cause problem to the users to lose their funds.
Liquidity Crisis: As the liquidity is provided by the investors in the market, then with the crisis of liquidity can lead to gas fee and price change.
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