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The interest rates for lending stable-coins on some of these platforms can be extremely high...I'm old enough to know that with returns like this there has to be a catch :) I'm trying to understand what risks of being a lender are. I'm specifically looking lending via fulcrum (which may or may not be relevant). As far as I can understand it:

  • I don't have counterparty risk in the way I would if I deposited on an exchange and made some capital available to margin traders. The counterparty is the Ethereum network.
  • There is no leverage involved so I cannot be liquidated...?
  • For stable-coins, as long as I believe in the peg there is no exchange rate risk.

I understand that the contract itself can be attacked and my capital could potentially be drained that way. What are the other risks involved with DeFi lending that I'm overlooking?

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There is no answer for question "what are the risks of DeFi lending" because decentralised finance is an ecosystem and has various lending products. Each lending product has its own risk model. They may or may not contain counterparty risk, but you need to break this down product by product, lending pool by lending pool.

2

Generally speaking, the main risk for DeFi platforms when your are a lender is in potential vulnerabilities within the smart contracts, rather than on parameters such as liquidation only affecting the borrowers. The top DeFi projects go through extensive auditing processes before their launch to the mainnet, but you will never have a 0 risk.

I see the higher interests to the lenders as a form of optimisation when compared to traditional finance where you assume extra or unnecessary costs or additional fees. However, these interests are considerably variable and sometimes difficult to understand (e.g.: try Yearn V1 through Argent and you will see the interest changing up and down every single day, a.k.a impermanent loss).

In fact, there is quite a lot of activity in DeFi insurance in the last months with platforms such as Nexus Mutual providing insurance against smart contracts failure, though it seems a bit expensive for the moment.

In summary, the risk will always be there, so the best is that you do some research on the different DeFi protocols, their security audits, their level of adoption, and then decide!

1

Q: What are the risks of DeFi lending?

A: It depends

The most important to me personally: smart contract risk and team risk (especially if anon).

Even if audited, the team can rug pull, dump and what not. Even if there is a timelock, do you know to interpret byte data on the blockchain?

Good resources to assess risk

Always DYOR

If too good to be true: probably is.

Check the calculators (multiple). Check pinned messages on Discord and Telegram. Check liquidity on Uniswap and Sushi... It's a dark forest out there, the number will not go up forever.

This is how I see it 😇

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