We think before investing in anything, you should always thoroughly do research on a project and ignore any FOMO sentiment you might have.

How to manage your risks in DeFi

Staying safe on the blockchain
Decentralized finance enables the development and adoption of new financial goods and services, but it's crucial to recognize that every financial or technological innovation may have flaws that put capital at risk.
The main dangers of taking part in the decentralized finance ecosystem are highlighted here.

High Market Volatility
This is the broad market risk that comes with owning digital assets that could fluctuate in value in relation to the US Dollar as market conditions change. DeFi products that enable users to invest in risky assets also expose consumers to market risk because the return on investment could not be sufficient to compensate for the price volatility of the initial asset invested.

Smart Contracts
Applications for decentralized finance (DeFi) are inherently unreliable. DeFi applications use smart contracts to control the exchange of assets. The execution of asset trades on a certain DeFi application is determined by smart contracts, which are basically bits of code running on the blockchain.

As with any program, there is a chance that hackers will try to take advantage of flaws in the smart contract software to take advantage of the project and drain it of funds. This danger is what we refer to as smart contract risk.

Rug Pulls
DeFi projects made by less well-known, occasionally nameless developers carry especially significant risks. Occasionally, we have seen developers abandon a project and flee with the money from investors by transferring money from the liquidity pool into their own personal accounts. Developers take use of the flaws in smart contracts that they themselves created and are therefore aware of.

DeFi applications rely on programs called Oracles to securely access data from the outside world, such as the price of a digital asset, on the blockchain. DeFi apps would be self-contained within the blockchain without oracles, which would have little practical use. Oracle dangers arise when the information on these oracles is unreliable or susceptible to manipulation.

When Oracle operators have the ability to change the asset's on-chain pricing, DeFi platforms are vulnerable to attacks.

How to avoid all this?

Invest only in DeFi projects whose smart contracts have been openly validated on the blockchain, meaning that the project's smart contracts' source code is accessible to the public.

It is necessary to check the smart contract code for any potential security flaws. This is shown through audits of the smart contracts conducted by reputable organizations like Paladin Security and Certik Blockchain Security, among others.

Review the social media, support options, response, and overall investor opinion of the project in great detail. Review the project's age, the developers' backgrounds, and other details as well.

Review the project roadmap as well to comprehend the potential for the future, timeline adherence, collaborations with other DeFi initiatives, etc.

We think before investing in anything, you should always thoroughly do research on a project and ignore any FOMO sentiment you might have.

Written By

Petrache Ionut

Jun 21, 2022