I simply completed a 2 hour readthrough of Nic Carter’s & Linda Jeng’s ‘DeFi Protocol Dangers: The Paradox of DeFi’ for the Ethereum Audible Podcast. They level out 5 key dangers – which have all come true over the previous yr.
This is a short abstract of the 36 web page article and 5 dangers.
DeFi is rising and is shortly on its method to turning into a brand new monetary paradigm. However…there are monetary dangers in DeFi that manifest in new ways in which we haven’t seen within the conventional monetary system. The 5 dangers identified are:
Interconnections with the standard monetary system
Operational dangers stemming from underlying blockchains
Sensible contract-based vulnerabilities
Different governance and regulatory dangers
Let us take a look at every.
Interconnections with the standard monetary system:
Stablecoins are the principle connection to the present monetary system. They’re pegged to fiat, but in addition by way of custodian banks. Stablecoins are one of many killer apps for crypto, however supply a centralization threat. Lyn Alden covers stablecoin centralization threat in her article: “Proof-of-Stake and Stablecoins: A Blockchain Centralization Dilemma” (did a readthrough of that a couple of weeks in the past: https://open.spotify.com/episode/3cTMt0friaFdmWwJvbDtmX?si=2MYAbps7Ra-fq50oEbCmUg)
2. Operational dangers stemming from underlying blockchains
Consensus failures (aka what occurred to SOL just lately), protocol adjustments, altering safety assurances (PoW or PoS) all could be threat vectors for any protocol constructed on prime.
3. Sensible contract-based vulnerabilities
All of the bugs you may think about that permit draining of funds. Most well-known of which – the DAO hack, but in addition most just lately the Wormhole hack. Oracle assaults are also a vulnerability vector (https://www.theverge.com/2022/2/3/22916111/wormhole-hack-github-error-325-million-theft-ethereum-solana)
4. Different governance and regulatory dangers
These dangers embrace dangerous regulation or multi sig administration – aka Axie’s Ronin hack. Flash loans can be utilized to sway governance as properly – a brand new threat distinctive to DeFi, aka the Beanstalk assault final week.
5. Scalability challenges
Inelastic block house can result in excessive charges, irregular execution or transactions that do not undergo in any respect – which result in surprising edge instances.
To convey all of it collectively, DeFi is creating tremendous quick, bringing extra innovation to the monetary world than any time for the reason that 1800s. However it comes with new units of threat. We’re in heading west, as they wish to say on Bankless!
For the complete readthrough (~2 hours) you can provide it a hear on @EthereumAudible podcast or learn the complete paper right here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3866699.
Take pleasure in!