Risk in Decentralized Finance: Is the DeFi Boom Another Bubble? — SFOX Edge

What Is Decentralized Finance?

Decentralized finance is the use of a leaderless financial system to offer and manage financial services through a governance maintained by token holders, rather than a central ruling board. The MakerDAO protocol, for example, allows users to open collateralized debt positions, staking 150% collateral to borrow sums of Maker’s DAI stablecoin, which is pegged to the U.S. dollar. The Compound protocol, as another example, enables users to earn compound rates of interest on their money, also in DAI, by lending it to borrowers.

Examining Risk in DeFi

There are a number of known risks to the DeFi ecosystem. The main component of DeFi is decentralized loans, with protocols typically issuing stablecoin loans collateralized with tokens such as ETH. Borrowers typically need to stake more than they borrow, such as staking $1,000 worth of ether for a loan of $500.

MakerDAO: Centralization and collateral risk

The lending protocol with one of the most locked assets is Maker, with 13% of DeFi’s value locked in Maker contracts.

Hacks and Exploits

Funds locked in DeFi are only as secure as the code of their underlying protocols. The swift rise of lending dapps is encouraging to some investors, but one risk of booming technology is that some projects will rush development to capitalize on demand.

Defi is tied to Ethereum

However, Ethereum is currently the dominant blockchain in DeFi, and it may not be possible to scale the blockchain to meet growing industry needs.

Progress in Scaling

Optimism also reported a drop in transaction delays of 75 times, as well as lower gas fees and exchange fees.

DeFi Moving Forward

While MakerDAO is one of the dominant market leaders, other projects are beginning to approach its volume of locked assets.

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