DeFi Risks and Limitations to Understand


Since bitcoin’s meteoric rise in 2017 and the crypto market’s extremely rapid development, everyone has been talking about blockchain again. In recent months, the term Decentralized Finance (DeFi) has received a lot of attention. DeFi is an ambitious attempt to deliver services without human intervention using Distributed Ledger Technology (DLT).

The Market

The DeFi market evaluates adoption by calculating Locked Value, which calculates how much money is currently working across the various DeFi protocols. As of June 2022, the total value of DeFi protocols is nearly $80 billion.

The blockchain’s growing popularity is fueling the spread of DeFi: once an app is encoded on the blockchain, it is available globally. While most centralized financial tools and technologies are introduced gradually over time and are subject to regional economies’ rules and regulations, dApps exist outside of those rules, increasing their potential gains – but also their risks.

Risks in DeFi

DeFi is an emerging phenomenon that comes with many risks. Being a young innovation, decentralized finance has not yet been stressed by long-term or widespread use. In addition, national authorities are scrutinizing the systems they are putting in place from a regulatory point of view.

Other risks of DeFi include:

Inadequate Consumer protection

DeFi has thrived in the absence of rules and regulations. However, this also means that users have hardly any rights of recourse in the event of a failed transaction. In centralized finance, for example, the so-called statutory deposit insurance schemes reimburse deposit account holders up to €100,000 per account per institution if a bank fails. Also, banks are required by law to hold a certain amount of their capital as reserves to ensure stability and withdraw money from your account whenever you need it. There are no similar safeguards in DeFi.

Hackers are a threat

While a blockchain is almost impossible to alter, other aspects of DeFi are at high risk of being hacked. This can lead to theft or loss of funds. All potential use cases of decentralized finance rely on software systems that are vulnerable to hacking.

collateral. Collateral is an item of value used to secure a loan. For example, when you take out a mortgage, the loan is secured by the home you are buying. Almost all DeFi lending operations require collateral of at least 100% of the loan value, if not more. These requirements significantly limit who is eligible for many types of DeFi lending.

Private Key Requirements

With DeFi and cryptocurrencies, you need to secure the wallets where you store your cryptocurrencies. Wallets are secured with private keys, which are long, unique codes known only to the wallet owner. If you lose a private key, you lose access to your funds – there is no way to recover a lost private key.

Conclusion: The future of DeFi

DeFi’s future looks bright, from cutting out the middleman to converting basketball clips into digital assets with monetary value. As a result, experts see DeFi’s promise and potential as far-reaching, even though it is still in its infancy.

Investors will soon have greater independence, allowing them to use their wealth in novel ways that appear impossible today. DeFi has significant implications for the big data sector as it matures and opens up new avenues for data commercialization.


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