Decentralized Finance, or DeFi, is an umbrella term referring to a host of new tools and services in the blockchain space, which aim to recreate traditional financial instruments in a decentralized manner. DeFi comprises tools that allow users to lend/borrow, exchange and swap crypto assets securely, without having to trust other parties that would normally be involved.
Most of these functions have been offered in crypto for years. What’s new about DeFi, however, is the fact that all these services now exist as independent and decentralized building blocks. These blocks are not controlled by third parties, mostly governed by smart contracts, and function thanks to the participation of the crowd. Which is you, us, and anyone interested in doing so.
First of all, deploying funds into DeFi instruments is not investing per se. When participating in DeFi, you’re collecting rewards for providing liquidity, facilitating trade, and enabling decentralized markets to function.
Although there are different strategies with various degrees of exposure to the value of the underlying crypto assets, some involving significant risks, DeFi investors with solid strategies in mind can return a profit without being unnecessarily exposed to price swings and market moods.
Essentially, DeFi actors collect the fees that have been traditionally amassed by centralized exchanges and money handlers - which profit whether the market goes up or down. Decentralization has led to a situation in which the public can now profit from this activity, rather than it being harvested by middlemen.
DeFi is an exciting new field with many opportunities, and we would encourage anyone to explore it! Given the right amount of knowledge, experience, and insight, you could deploy your funds yourself and earn healthy returns. However, getting there may take you a while and costly mistakes can definitely be made.
Our goal is to provide you with a safe and easy-to-understand entry portal to this new field of opportunities, while saving you time, tons of effort, and reducing risks due to human error to a bare minimum.
While the most common risks involved with DeFi are simply due to human error (using the wrong tools to the wrong end, misconfiguration, etc.), there are of course market and other systemic risks involved.
Here’s a table showing innate DeFi risks, and the degree to which YIELD can protect you against them
As said above, the most common risks involved with DeFi are due to human error. There’s a whole slew of DeFi instruments out there, which may interact in all sorts of interesting ways. Misusing them may prove costly.
YIELD curates a list of well-tested and audited strategies, which are assembled by industry-leading experts. Our user interface makes it impossible to make technical mistakes while choosing DeFi strategies. All your activity on YIELD occurs in a secure environment that completely eliminates the potential for human error.
Smart Contract Risks
DeFi instruments, such as decentralized exchanges, lending platforms, etc, are essentially governed by smart contracts which can’t be stopped or amended once they have been deployed on the blockchain. If you’re using a new, unaudited contract, you’re exposed to potential errors in their code.
YIELD either audits all used contracts in-house, or relies on detailed reports by our trusted and industry-wide respected partners.
It’s a wild world out there, and the promise of high and quick returns incentivizes malevolent actors to create malicious DeFi tools that may endanger user’s funds on purpose.
Just as with smart contract risks, thorough audits and analysis eliminate fraud risks almost completely. If we can’t identify how a DeFi tool creates returns while providing value to the market, we won't come anywhere near it.
Providing liquidity to decentralized cryptocurrency exchanges exposes you to some degree to the price swings of these assets. This is far from the risk involved in buying them directly, but if BTC, ETH, and co. go to absolute zero tomorrow without heading up again soon after, some of your deposits will be endangered.
Our positions are conservative, hedged, with the option to add additional insurance. In almost all cases a sudden drop in crypto asset value will not result in losses on your side, however, some market risks in case of catastrophic events remain and should be taken into account.
Some DeFi tools require depositors to lock their assets for a certain period or until a predefined event occurs. This may result in a situation in which you can’t exit all your positions immediately.
YIELD relies mostly on liquid positions, while securing Fiat reserves against illiquid ones. Therefore, a Run on the Bank scenario is virtually impossible with YIELD. You’ll always be able to withdraw anything on your account at any time.
A major component to liquidity mining is the use of crypto-economic incentive mechanisms which drive players to behave in ways beneficial to the ecosystem. Since advanced strategies may combine many of these mechanisms, and since the interaction between them may be highly complex, unpredictable outcomes may occur when market conditions change radically.
Complex does not mean unintelligible. YIELD uses mathematical prediction models to map out edge cases and employs automated monitoring systems to track indicators that signal their approach.