By eliminating the need for traditional financial middlemen such as exchanges, brokerages, and banks, DeFi claims to make financial services cheaper and faster. DeFi supporters also say that by allowing everyone to access financial services on decentralized block chain networks, it will increase competitiveness and financial inclusion. However, the actual applications of DeFi are still restricted. The prospect of unsustainable high profits drives most of retail investor interest in DeFi. Some Best DeFi Coins to Buy ventures claim yields or interest rates that are many orders of magnitude higher than those accessible in the traditional financial sector.
What are the dangers?
Digital tokens’ speculative nature
Cryptocurrencies and DeFi are inextricably related. No matter how trustworthy they are, their rates are known to vary drastically, perhaps even collapsing to nothing. Earn more about the hazards associated with cryptocurrencies and digital tokens by clicking here.
Investors should be sceptical of promises that they may earn consistently high returns with little or no risk. DeFi’s annual percentage yield (APY) is sometimes many times that of the traditional banking sector. However, it is sometimes unclear what income streams finance such exceptional profits, which should raise an eyebrow. Some lending platforms and crypto funds invest their clients’ assets in other best defi projects or crypto-platforms that do not have consistent revenue streams.
DeFi projects are more vulnerable to malicious attacks due to their open-source and decentralised nature, and the level of security varies greatly between protocols.
Asymmetry in information
Unlike standard financial investment products, DeFi initiatives are unregulated and do not need disclosure. As a result, the ordinary investor may lack access to adequate information to fully analyses investment risks and appropriateness. Governance frameworks that are opaque and simple to control can also mislead investors. Some of these may be designed to benefit the project’s early supporters, such as venture capitalists, at the expense of secondary investors.
A rug pull occurs when developers quit their DeFi project and flee with investor monies. A pump and dump scam involves fraudsters intentionally “pumping” the value of a token, such as by presenting misleading or fraudulent information to increase buying demand, and then “dumping” the tokens they are holding at the inflated price to profit.
If there is no intermediate or central party in control, you will have no one to turn to or hold accountable if things go wrong. If something goes wrong with a transaction, you have limited recourse if your funds are stolen from DeFi projects.