Blockchain and Cryptocurrency Beginner - Risk involved in DeFi
Risk due to very high transaction fees which can lead to unprofitable investment
The rise of DeFi and the increased use of DeFi products have seen the massive increase in transaction fees, these has caused the transaction fees on blockchain networks like ethereum to skyrocket, leading to very high transaction fees on the ethereum blockchain. While this high transaction fees mean nothing to some investors who invest with large capitals, the very high transaction fees can lead to unprofitable investment for a lot of smaller investors who invest few hundreds of dollars. For instance, it would be very unprofitable to pay $100 transaction fee to swap a $150 worth of token.
Risk involving high price volatility of cryptocurrency
We all know that the cryptocurrency market is very volatile. This can be a problem and a big risk in DeFi. Users who stake their asset for a long period of time can end up losing their investment because the value of their investment have depreciated due to the high volatility of the staked cryptocurrency asset.
Risk due to impermanent loss
This is a type of risk that is involved in DeFi and mostly common to liquidity providers. Decentralized exchanges such as uniswap allows anyone to add liquidity to the liquidity pool by becoming liquidity providers and earn reward in the process. The risk due to Impermanent Loss is when a liquidity which is added in the liquidity pool and the price of the assets that have been added to the liquidity pool changes compared to the time the liquidity was provided. The high change in price could cause the liquidity provider to incur impermanent loss.
Loss of funds due to failed transactions
This is also very common in DeFi. Funds can be lost when transaction fails especially when using DEX like uniswap and paying high transaction fees.
Hack involving smart contracts
the rise of DeFi has also cause an increase in hacking attempts. Back actors try to exploit and take advantage of loop holes in smart contracts to steal user funds and assets.
Scams projects and phishing attacks
This is also a big problem in DeFi. Over the months, we have seen the increase in scam projects in the DeFi space who just want to take advantage of gullible users and steal their funds. Some scam projects do what they call rug pulling. Also, phishing attacks has increased as scammers try to steal user funds by creating the replica and fake version of original platforms take advantage of gullible users.
