Decentralized finance has many of the hallmarks of previous cryptocurrency bull markets: incredible gains, extreme volatility and massive risks. In a new report, leading noncustodial cryptocurrency exchange ShapeShift explains the four biggest risks facing DeFi investors and why the emerging field of decentralized insurance could offer a solution.
The report, titled “Spreading the Risk: Decentralized Insurance,” categorizes DeFi risk into the following “landmines”: custodial risk, smart contract risk, protocol risk and oracle risk.
The history of crypto is filled with examples of centralized exchanges “losing or absconding with users’ funds,” argues report author Kent Barton. For smart contract risk, one needs only to consider “the DAO incident” in 2016 in which 3.6 million Ether (ETH) was drained.
Major protocol-level risks haven’t been spotted just yet, but that could quickly change as the market continues to evolve. Oracle risk is in the same category, but one that is much harder to quantify or predict. Still, Barton reminds readers that the so-called DeFi