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What are the risks of DeFi and how can they be mitigated?

4 min read

Anyone serious about DeFi investing will have some concerns about the risks involved in investing in the space. On our most recent Fridays with YIELD App YouTube show, which took place on November 5, 2021, we discussed how users can navigate and assess the risks in DeFi with two of our partners: DeFi risk analysis pioneer Credmark, and cutting-edge insurance protocol Steady State Finance.

Credmark’s founder Neil Zumwalde and chief strategy officer Momin Ahmad joined Steady State’s founder Jonathan Libby for a lively discussion on how insurance and risk assessment works in the DeFi space, what they are doing to make this less complicated, and what users can do to protect themselves from fraud. Here, we have compiled a concise summary of the live show.

What challenges do you face trying to build insurance in the crypto space?

Neil Zumwalde: Our risk team comes predominantly from TradFi. The trick is to create DeFi analogues to TradFi factors, because a lot of it is the same. It’s taking that traditional research and applying it to crypto, where the market risk is going to be really high. 

The trick in crypto is figuring out which situations you can apply crypto specialized risk analysis to. One of the very first questions we ask is: can I always get back my original asset? Then we have the liquidity risk of that protocol. The next question is: what is built on top of that protocol? Once we figure out the risk at the bottom, then it’s just a matter of bubbling it all the way up the stack.

How does the community help you build your product?

Neil Zumwalde: If you are a community member in Credmark, the final version of our protocol is going to be one where you can go in and investigate all the different assets we support, all the different protocols we are looking at, all the different pools. And you can see which one is missing, build your own, and get rewarded for building those models. But even before we get to that fully composable platform, we are really relying on our community to help us stay up to date with these DeFi protocols.

Jonathan Libby: We have two clients in this system: the insured and also the people that provide capital. We need people that can look at the model and say “this makes sense”. Our community is really active. At the moment, we have them looking at some documents and we’re trying to get their feedback on how we are developing this to make sure we are building a product for the people. 

How are you working to make digital assets less complicated?

Neil Zumwalde: Most people have a tough time with probability, and with risk it’s all about the probabilities of different things happening, and if it does happen, how much money do you lose? If we can boil it down to those metrics, then we can communicate what we are doing a little better.

What does Steady State look like to a YIELD App user?

Jonathan Libby: We are trying to build a model where the protocols are getting insurance and they can offer it to their community in any way they think is best. For YIELD App users, ideally Steady State isn’t something you will have to interact with - you won’t even have to see it. This is what we want to build as a business insurance solution. The people that want to be part of the Steady State community are then business insurance contributors. 

How can people avoid getting drawn into a crypto hack or an exploit?

Jonathan Libby: We have this tendency as a community to do no due diligence before investing in something and not think about any risk at all. We just see gains where we want to see gains. Simple due diligence would save us so many problems. 

Neil Zumwalde: In DeFi protocols,  think about it: what does this actually do? If the answer is nothing, there you go. 

To find out more about how YIELD App generates its yield, delve into our Q3 Report here.

And for those who want to watch the full Fridays with YIELD App session, you can find the recording on our YouTube channel.

Do you want to make 8% - 18% APY on your USDT, USDC, ETH and BTC? Sign up for a YIELD App account today! 

DISCLAIMER: The content of this article does not constitute financial advice and is for informational purposes only. The price of digital assets can go down as well as up, and you may lose all of your capital. Investors should consult a professional advisor before making any investment decisions.


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