Risks
There are certain factors that should be considered before participating to any DeFi application. These risk factors are linked to the companies, their activities, sectors of activity and structures. These risk factors include in particular (in a non-exhaustive manner and in no order of materiality):
• Smart contract risk: because you are surrendering your funds to a smart contract, you take on the risk that these contracts might be exploited, whether it is from attackers, or the team itself.
• Risk of depreciation in price of the underlying asset: if the tokens you stake fall in value, the yield obtained might not make up for it.
• Impermanent Loss risk: While some farms offer single asset staking, Certain farms also require users to stake Liquidity Provider (LP) tokens, which expose the user to Impermanent Loss. This occurs when there is a divergence in the percentage price change between the two assets.
• Competitive landscape: DeFi is a competitive market, with ever-increasing competition which may lead to lower pro fi t margins. The fintech industry that provides financial and technological services to companies or individuals is characterized by intense competition. There may be new entrants in this market, and new or existing competitors may have greater financial resources, better personnel, better history and market recognition.
• Employee misconduct: Businesses run the risk of employee misconduct that could include requiring the employer to engage in transactions that exceed authorized limits or present unacceptable risks, or hiding unauthorized or unsuccessful transactions from the employer, either of which may result in unknown or unmanaged risks or losses. Employee misconduct could also involve misuse of confidential information, which could result in regulatory sanctions and serious reputation damage.
• Operating risks: Operational risk is the risk of damage resulting from inadequate or failed internal processes, employees and technologies or from external in fluences. This definition includes legal and reputation risks. In the company's understanding, operational risk also includes compliance risk, outsourcing risk, dilution risk and fraud risk.
• Litigation or Disputes: Businesses may be involved in disputes with different parties involved. Such litigation may result in legal, administrative and other protests and lawsuits, which may damage the the company's reputation, result in additional operating costs and divert management's resources and attention from its core business activities.
Last modified 2yr ago