Defi Risks and How to Navigate Defi Protocols Safely
Decentralized Finance popularly known as Defi has its pros and cons, we will be looking at the advantages, disadvantages, and how to stay safe while interacting with any Defi Protocol.
Traditional finance and its attendant crisis have made people lose confidence in this old system of finance and this has birthed Defi which clearly is devoid of any intermediary or interference.
Without a doubt, Defi appears to be the most prominent Cryptocurrency sector at the moment with several projects taking advantage of this new technology to roll out different projects with different functions. As much as many people believe Defi is the future of finance and are excited about it, there exist some risks associated with every new technology and Defi is not an exception.
Challenges Facing Defi Projects;
Most challenges Defi have comes from the blockchain they are built upon, over 90% of Defi Projects are built on the Ethereum blockchain, let’s take a look at some of the problems bedeviling Defi on Ethereum blockchain.
1. Scalability: We are all witnesses to the congestions witnessed on the Ethereum blockchain, the low turnaround time for transaction confirmation, high transaction fees, etc are just some of the scalability issues we experience on the Ethereum blockchain and this invariably affects any Defi project built on the Ethereum blockchain.
2. Smart Contract: When smart contact codes are written, lots of caution is needed to have any flaw or bug in the code as this will lead to loss of funds.
3. Low Liquidity: A good number of Defi projects have a sizeable number if it’s tokens locked, this obviously affects Liquidity
4.Lack of Insurance: There is barely any insurance for many Defi Projects, Insurance protects investors and traders from losses but this is practically nonexistent in the Defi sector
5. Rug pulling: Many people had fallen victim to this activity. Just recently the founder of Sushiswap rug pulled on the project and converted all his Sushi tokens to ETH and this caused the price of Sushi to fall below $1. Please note the founder later returned the Sushi tokens and the price of Sushi became stable as at the time of writing. The above is a typical example of rug pulling and we all need to exercise caution in any Defi project and also conduct due diligence before investing in any Defi project.
when we say Navigate Defi Protocols Safely, What to do to stay safe?
The nature of Defi transfers responsibilities from intermediaries to users hence the safety of your funds or digital assets lies with you. A lot of users are not used to using Defi yet unlike in centralized exchanges where some level of control is with the exchanges, In Defi, the entire responsibility lies with the user. Proper research is needed in any Defi project one wants to invest in.
Again, most smart contracts of Defi protocols use Admin keys to control it. The keyholder of these keys can make changes to the protocol, it’s important to note that the most effective of them all is the use of Multi-signature or Time-locks to control the smart Contract, it’s imperative to look out for projects with this sort of control as they tend to be genuine.
Safe custody of your wallet: Decentralized Financial also means users have greater control of their assets. It is generally recommended to use wallets that give you access to private keys and passphrase which can help you recover your wallet in case you lose your device. Always store your private keys and passphrase offline to avoid hacks.
Several well-known scams exist on Defi platforms, any project asking you to send funds to receive tokens is most likely a scam, avoid projects that ask you to send funds to receive airdrops.
Some Defi protocols have community governance options in the form of Governance tokens. This lets token holders propose and vote on key decisions to be implemented about the platform, also note that such decisions in some cases affect the price of such tokens as such one should always watch out for news likely to affect the price of the tokens.
Conclusion: Defi Risks and How to Navigate Defi Protocols Safely
Decentralized finance has come to stay and it has removed the conventional control of having middlemen thus putting total control into the hands of the users without interference. We should always exercise maximum care in keeping our digital assets safe and when interacting with any smart contract.
Stay safe while on Defi.