Understanding the potential risks involved with DeFi will keep you safe while you dip into DiviDeFi.
December 16, 2022 · 4 min read
To keep you safe and give you the information you need to make informed decisions about DeFi, we need to cover some of the more common risks associated with decentralized finance. The following list is not comprehensive, but it does comprise the most common areas where funds get lost.
Bugged smart contracts
Impermanent loss is a phenomenon that can occur when participating in DeFi protocols. It refers to the potential loss of value that a liquidity provider may experience due to fluctuations in the values of the assets in a liquidity pool, compared to simply holding the assets in your wallet.
This potential or impermanent loss happens when the value of one of the assets in the liquidity pool increases or decreases, resulting in a mismatch between the values of the assets the liquidity provider deposited as well as the value of their share in the pool. This loss is considered "impermanent" because it is not a permanent reduction in the value of the assets but rather a temporary fluctuation. The impermanent loss only turns into a realized loss if you withdraw the liquidity (your position) while experiencing the impermanent loss.
For a more granular look at impermanent loss and a helpful example, please refer to the linked article.
Slippage refers to the difference between the expected price of a trade and the actual price at which the trade is executed. This can occur when there is a large discrepancy between the supply and demand for a particular asset, causing the price to move unexpectedly. This can be especially common in markets with low liquidity.
Slippage can be a serious issue because it can lead to unexpected losses for users who are trading on decentralized exchanges. To avoid slippage, DeFi users should carefully consider the potential for price movements before placing trades.
Bugged Smart Contracts
A "bugged" smart contract is a term used to describe a smart contract with a programming error or flaw that causes it to malfunction. This can be a serious issue in the world of decentralized finance because smart contracts are often used to manage financial transactions and funds. If a bad actor can identify a bug in a smart contract, they can use it to their advantage, potentially leading to the loss of funds for users who are relying on that contract.
This is a serious risk that Divi has considered extensively. Because user safety and security is paramount when using Divi DeFi applications (dApps), the team has thoroughly tested and audited these smart contracts before deploying them to the blockchain.
A social engineering attack is a type of cyber attack that relies on manipulating people to gain access to sensitive information or systems. This can be done through various means, such as phishing emails, phone calls, or in-person interactions. Social engineering attacks can trick people into giving up their private keys or persuading them to send money to a fraudulent address.
These attacks can be particularly effective in the DeFi space because many people are unfamiliar with the technology and may be more susceptible to such tactics. It is vital for individuals to be aware of these types of attacks and to take steps to protect themselves.
A rug pull is a term used in the world of decentralized finance (DeFi) to describe a situation where a project creator or team suddenly withdraws their support for a project, effectively "pulling the rug" out from under its users. This can happen for various reasons, such as the team members deciding to cash out and move on to a different project or because the project was a scam from the beginning.
A rug pull can be a serious issue for DeFi users, as it can lead to the loss of funds that were invested in the project. To avoid falling victim to a rug pull, it is important for DeFi users to research the projects they are considering investing in thoroughly.
The risks associated with DeFi are highly varied, and it is essential to be aware of them before you decide to invest in a particular DeFi project. Whether it's a bug in the smart contract or a spectacularly executed social engineering scam, you should know what to watch out for. While no single solution can eliminate all risks, the Divi Project team is working hard every day to build an ecosystem that is as safe and secure as possible. We encourage users to reach out directly in our Discord with any concerns or questions.
Up Next: DeFi Bridges and what to know to stay safe
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