DeFi Risk
Yield Strategy, Security
DeFi Risk refers to the unique set of risks and vulnerabilities that users face when participating in decentralized finance (DeFi) protocols, platforms, and strategies. Unlike traditional finance, DeFi risk is mostly non-custodial and can include smart contract bugs, protocol exploits, rug pulls, impermanent loss, and volatile token prices. Because DeFi operates permissionlessly, users are responsible for their own security and due diligence.
Use Case: A user deposits tokens into a high-yield farm and later discovers a vulnerability in the protocol’s smart contract, resulting in a loss of funds—even though there is no central party to appeal to or recover assets from.
Key Concepts:
- Yield Farming — Strategy that involves DeFi-specific risks from both market volatility and protocol security.
- Liquidity Pool — Pools are subject to smart contract risks and impermanent loss.
- Impermanent Loss — The loss LPs can experience due to price divergence of pooled assets.
- Rug Pull — When protocol creators or insiders maliciously drain user funds.
Summary: DeFi risk is the tradeoff for accessing high-yield, permissionless finance. Understanding contract code, project reputation, and market cycles is vital to protecting capital and profiting safely in the DeFi ecosystem.