DeFi Risks Explained: How To Stay Safe On The Blockchain?

by Admin
Blockchain

DeFi, also known as decentralized finance is the first fastest-growing section in the Crypto industry. I mean, it already has more than $92 billion worth of Cryptocurrency locked in a peer-to-peer protocol. And, the price has risen by 196% since the previous year.
However, there’s something you need to know about the DeFi market.
Although the growth of decentralized finance is lucrative enough, it still isn’t as perfect as you might think it is from the outside. For example, like the source of opportunities, the risk of getting scammed is quite high in this aspect as well.
Therefore, before you think about getting into this industry, let’s learn the bits and bobs of the same a little.

DeFi – What Is It Again?

blockchain-based platform

DeFi, in essence, is a protocol solely based on a blockchain-based platform. It offers a wide range of financial services that you typically would find in a traditional space, like –

  • Insurance. 
  • Loans, and
  • Interest-bearing account.

However, the main difference is that a DeFi system usually works by using a smart contract. So, there’ll be no intermediary available here, like a bank or anything as such. Also, before I forget, you can use a dedicated trading program like quantum ai to work in this aspect.

What’s The Risk, Then?

Like any other blockchain-based program, decentralized finance can be quite risky. And, the issues can be roused due to several reasons. The following are a few of them.

Problem – 1: Smart Contract Risk

Honestly, a DeFi environment is trustless, from almost each and every perspective. Wait, let me give you an example to let you know more about it.
A DeFi module generally works in a smart contract infrastructure. So, if you want to execute them, you’ll need to meet the requirements provided there accordingly.
However, like any piece of software, this can prompt a hacker to hack the system and exploit the bugs. If they’re successful, they can also drain the funds from there.

Problem – 2: Market Risk

The general market risk is about the imponderability of Cryptocurrency’s price, which may go down or go up at any time. This, in turn, might affect your investment in a volatile asset or two, wherever you have kept your money.
For example, in December 2021, the price of Bitcoin went up to the highest high at $60,000. And, since then, it’s been going down massively. This, in turn, has led many people to go bankrupt, especially those who put all of their money in the market.

Problem – 3: Oracle Risk

A DeFi application tends to rely upon a software program called Oracle to access external, additional data on blockchain. Without it, DeFi would be a self-contained module operating within the aforesaid technology. Hence, its overall reliability wouldn’t be good enough either.
The risks regarding Oracle occur when these programs are faulty or have been manipulated by someone else. It, in turn, can make a DeFi system susceptible to attacks from the outside, especially through a high-end mechanism.

Managing Risk

blockchain-based platform

If you are thinking that decentralized finance is immune to fraud, then you can’t be any more wrong. As long as you are using technology for anything, there are always potential hacks you need to be aware of.

Hackers can steal your crypto assets under your nose, and you will never know when that happens. This is why it is important that even though you are using decentralized technology, you do your due diligence before participating in DeFi.

Here are, we have listed down a few things you can do to ensure you are safe while using DeFi.
You can start by looking into the token’s website. There you will be able to get all the information related to tokens. First, check the application you are exploring for security. In addition, you should check whether the code is shared publicly and follow online forums to see whether people have raised any security concerns.

Your private keys are important, and you must also ensure that they remain disclosed among your family members. While there are many wallets that help you store your Crypto assets and private keys, there are non-custodial and self-custody wallets where you are in sole control of your keys.

Join the community group chats on Telegram or Discord. Here you will get all the information you need about the network and technology. While you are in the online community, you must never trust just anyone giving advice and offering a helping hand. You must analyze their approach and see them as a potential threat. After all, there is no limit to fake online accounts showcasing them as influencers, celebrities, and team admins.

How Do You Stay Safe?

When it comes to working in the DeFi market, you have to learn how you can identify the common red flags in the market. We have mentioned a few of them in the previous section. But, if you want to know about something else, you can go through the following tips too –

  • Do proper research before making a single investment in the DeFi market.
  • Follow a project from the beginning to the end to check if it’s a scam or faulty or not.
  • Keep an eye on the oracle of the DeFi system to ensure that it’s safe to use.
  • Assess the smart contracts and ensure that they’re not changeable in any manner.

The Bottom Line

So, there you go – a list of the risks related to the DeFi market and how you can take care of them. Hopefully, this blog has answered all of your questions and helped you enough to make your mark in the market. However, if you still have any confusion or query, feel free to ask us all about it. We’ll try our best to get back to you as soon as possible.

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