Wall Street Journal's Alexander Osipovich observes the trends and tragedies of the turbulent segment of decentralized finances (DeFis) in a detailed review. But is that really riskier than investing in TradFi products?
Greater risks, greater yields
The article released on July 17, 2021, covers the most popular ways to benefit from the activity in decentralized financial protocols (DeFis). Namely, the concepts of staking, "yield farming" and decentralized lending/borrowing are explained.
Yield farmers chase double-digit interest rates on crypto holdings, but it’s risky: "It’s the virtual equivalent of handing your money to a stranger." https://t.co/xWShOhoPcm— The Wall Street Journal (@WSJ) July 18, 2021
As per the text, investors are attracted by unparalleled APY rates offered by the majority of DeFi protocols. All of them are far more impressive than those of savings deposits in the U.S.
"Yield farming," the earning of a portion of lending profits raised by this or that protocol is among the riskiest investing instruments. Investing digital assets in DeFis poses huge risks to all crypto enthusiasts involved as DeFi protocols only exist on-chain. Therefore, its customers are not protected by the Federal Deposit Insurance Corporation.
For instance, prominent investor Marc Cuban fell victim to a cascade of flash-loan attacks against Iron Finance (TITAN), the high-risk DeFi protocol he invested in.
When transparency matters
Mr. Cuban told WSJ that unbelievably high rates of DeFis seem reasonable due to unmatched risks associated with the protocols:
Yield farming is not much different than buying high-dividend paying stocks or high-yield unsecured debts of bonds. There is a reason they have to pay more than other companies. They are at greater risk.
Meanwhile, DeFi proponents disagree with some of WSJ's messages about the risks and transparency of decentralized protocols. Santiago Roel Santos, a partner at crypto-focused asset management fund ParaFi Capital, opined that it is traditional financial institutions that lack transparency compared to DeFis.
Depositing $ into a smart contract is hardly "handing your money to a stranger" as the code that defines what the contract can do can be inspected & monitored by anyone 24/7/365. Handing your money to a bank is. While regulated, there is no transparency into what they do with it. https://t.co/nfLtXyWpe8— SantΞago R Santos 🦇🔊 (@santiagoroel) July 17, 2021
Top-league DeFi developer Banteg (@bantg), core dev of Yearn.Finance (YFI) yield aggregator, agreed with Mr. Santos:
Bank: Trust me bro. DeFi: I trust you anon.