The overwhelming majority of DeFi projects require trust in a central party and interaction with complex, buggy, and easily hacked contracts.
Rewards for interacting with these contracts often come from the minting of new tokens, necessitating confusing (and usually centralized) economic mechanisms that attempt to give the underlying reward token some value.
Developers who design and implement these economic reward mechanisms typically have no expertise in economics.
This places an enormous amount of risk on individuals that choose to interact with DeFi smart contracts. For simplicity, lets break down some of the different kinds of risk accepted by your average DeFi participant:
- 1.Price and Market risk: Price movements of a specific token or the market as a whole that negatively affect the token holder.
- 2.*Trust related risk: *Individuals or teams behind a project performing actions that negatively affect the token holder (rug pulls, large token unlocks and dumps, etc..)
- 3.Security risk: Vulnerabilities in smart contracts or interfaces that the token holder interacts with.
- 4.Economic Design risk: Tokenomics that are poorly designed and unsustainable.