Is DeFi Trading safe?

The name DeFi is now known to most crypto-enthusiasts but it may not be the same when it comes to protocol security. The security on the DeFi market and especially the risks involved when investing are still sometimes too unknown.

That’s why today we will answer these questions: Is trading on DeFi safe? What are the risks of trading on DeFi ? How to trade on DeFi when you are a beginner ?

Are you ready for it ? Let’s get started!

What is DeFi?

Decentralized finance, or “DeFi”, is an emerging digital financial infrastructure that theoretically eliminates the need for a central bank or government agency to approve financial transactions.

What are the risks of DeFi trading?

There are several kinds of risks when trading in the DeFi ecosystem but the one that comes up most often in the news remains the hack. This can happen when a flaw is detected in a smart contract, which allows the hacker to break in and walk away with the funds.

Another very important risk is the so-called “rug-pull”. This consists of the creation of a project and the listing of a corner with the promise of an amazing return, sometimes with a PRA exceeding several million percent. It cannot be said enough, when it sounds too good to be true, it usually is too good to be true. Rug-pull occurs when the founders stop the project all of a sudden and leave with the funds, leaving the investors with a total loss.

We can also add to this list of risks, the pure and simple scams by means of either phishing techniques or more directly through Telegram. These scammers take advantage of beginners in the crypto-currency world to extort capital from them.

According to the REKT Database application of Defiyield, over a period of one year at the time of writing, more than 43 billion dollars of value have been lost, and 40 just for the Terra case. This figure should be taken with a pinch of salt since a second token was created, but even without that, it still adds up to more than 3 billion dollars stolen in various scams.

How to mitigate the risk?

For a beginner the DeFi ecosystem may seem scary at first glance as it is certainly a bit more complicated than trading on centralized trading platforms such as Binance.

Fortunately, there are hedging solutions, which work like insurance, that you can buy to protect yourself against a vulnerability in the smart contract for example. There are several types of insurance, including depeg risk in the case of stablecoins. This would have been perfect when Terra collapsed for example.

It is therefore possible to limit the risk but subscribing to this type of insurance is still complicated for beginner investors.

Conclusion

As in everything, trading on the DeFi ecosystem involves risk, without risk it is impossible to make a profit, right?

Nevertheless there are ways to protect yourself against the most common forms of risk on the DeFi protocols like depeg or a flaw in the Smart contracts.

Finally, the best advice in my opinion, never put all your eggs in the same basket!

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