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. The DeFi space comprises tools that allow users to lend\borrow, exchange and swap crypto assets securely without having to trust other parties that may be involved.
Most of these functions have been offered in the crypto space for years. What’s new about DeFi, however, is the fact that now all these services exist as independent and decentralized tools that are (almost) not controlled by third parties, are 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 not buying a speculative asset, rather you’re collecting fees in return to providing liquidity, facilitating trade, and enabling decentralized markets to function.
Although there are different strategies with different degrees of exposure to the value of the underlying crypto assets, some of them involving significant risks, DeFi investors with solid strategies in mind can return a profit without being unduly 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.
First of all, you don’t. DeFi is an exciting new field with many opportunities, and we would encourage anyone to explore it in depth. Given the right amount of knowledge, experience, and insight you can 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.
Sure there are. While the most common risks involved with DeFi are simply due to human error (using the wrong tools to the wrong end, misconfigurations, 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 zoo of DeFi instruments out there, which may interact in all sorts of interesting ways. Using them incorrectly may be painfully costly.
YIELD curates a list of well tested and audited strategies, which are assembled by industry-leading experts. Our user interface makes it nearly impossible to make technical mistakes while choosing DeFi strategies. All your activity on YIELD occurs in a well-guarded sand-box environment that eliminates the potential for human error almost completely.
Smart Contract Risks
DeFi instruments, such as decentralized exchanges, lending platforms, etc, are essentially governed by smart contracts which often can’t be stopped or amended after they have been deployed on the blockchain. If you’re utilizing 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 incentivises malevolent actors to create malicious DeFi tools that may endanger user’s funds on purpose.
Just as with Smart Contract risks, thorough audits and analyses eliminate Fraud Risks almost completely. If we can’t identify how a DeFi tool creates returns while providing value to the market, you won’t be able to touch it through YIELD.
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. However, standard swings of up to 20% percent daily will in most cases not be felt by hedged actors in the space.
YIELD can protect you to some degree against Market swings. 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.
There are various DeFi tools. Some of them 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. Hence, a Run on the Bank scenario is virtually impossible on YIELD. You’ll always be able to withdraw anything on your account at any time.
A major component to Yield Farming is the utilization of crypto-economic incentive mechanisms which drive Yield Farmers to behave in ways beneficial to the ecosystem. Since advanced YF strategies may harness numerous of such 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.