How to make it in DeFi (pt.2) - Risks
Let's talk about risks and where to seek information in the DeFi space. First of all, if you missed part 1 you can find it here >> Article , in this article I will continue to discuss how to make it in DeFi but now we need to address the risks and what you should look out for:
1. Smart contract risk:
DeFi protocols are able to do what they do because of numerous and often sophisticated smart contracts that operate on the respective blockchain that the protocol is running.
As with most computer software there is a chance that small contracts can get hacked. This isn't necessarily something that you can spot immediately. You should therefore ensure that it has been audited by a firm that is well-known for providing a quality smart contract audit (more about this later).
2. De-peg risks:
The premise behind stable coins is that they retain the same value as the currency that it is pegged against and therefore retaining that peg is vitally important. For example what if USDT/UST/DAI isn't worth $1?
But it is also important for tokens that are pegged to the native token, for example FTM/TOMB.
3. Liquidity risk:
Let's say you lend out your tokens to a DeFi platform, and then the DeFi platform lets people borrow your tokens. If you want to withdraw your tokens you can't (unless there are tokens available at that particular moment).
Don't think this is a huge risk, but it's worth mentioning.<