In recent times DeFi, have been one of the most current topics regarding Finance systems on the Blockchain, it is decentralized; and it can be conveyed safely within an online platform without having a single authority backing it as a payment system.
However, although virtual and digital currencies have become well established and are accepted as a means of payment, the use of such services is not without its problems and legal challenges.
DeFi, aims to give users an alternative by removing the need to trust centralized parties and opening its doors to the world. This is achieved by building financial services in an open, permissionless, and decentralized manner.
There are risk and issues concerning the legal status of DeFi and its regulation, The purpose of this guide is to encourage responsible use of DeFi platforms, rather than mere speculation on future token value.
Decentralized Finance Risk
DeFi risk is any of various types of risk associated with financing in the Decentralized ecosystems
Despite the excitement over its potential, DeFi comes with many challenges.
So what’s the problem?
While DeFi continues to grow, This is the point where DeFi related hacks and cyber theft are on the rising.
It may seem obvious, but hackers often target financial institution, Then again DeFi is providing the framework for financial applications with your digital assets,
So lets look at the challenges that comes with Decentralized Financing;
What are the risk of DeFi
Blockchain has proved to be far more valuable than the currency it supports but what are the Financial risk associated with it when Transacting. As we begin with DeFi it is important to make sure the following essential checks have been made for your safety and the safety of others.
- User Error: By design, Transactions on the Blockchain are irreversible, meaning nobody can stop your transaction once you push the send button, But there’s one small catch, To avoid sending cash to the wrong address, IT is best advised to copy and paste the bitcoin address of the person on the receiving end, instead of typing it manually.
- Failure of Smart Contracts: Smart contracts are still a new practice, On July 2015 Ethereum Introduced the first blockchain platform to feature the smart contract.Even though DeFi protocols go through audits, and formal veriﬁcation processes, there are also Decentralized insurance providers that cover for wallet and smart contract failure at the code level.
- Over-Collateralized: On decentralized lending platforms, all loans currently require more value deposited as collateral than the borrower is able to withdraw. This is because there are no on-chain identity, KYC, or credit score protocols that have gained enough traction to facilitate unsecured credit on a large scale. In order to be considered by traditional finance as an additional service in unsecured lending, this kind of infrastructure must be in place
- Regulation risk: Decentralized projects operate without a license in most jurisdictions, regardless of where the end-user is based. The vast majority of DeFi protocols are built in a permissionless fashion which means Regulation in the DeFi ecosystem will be difficult to accomplish. While this democratizes DeFi for the greater good, regulators are concerned it will become a haven for individuals who seek to illegally obtain access to financial services.DeFi users interact with decentralized apps directly through their own Digital Wallet (i.e. a wallet for which the user controls the private key) Since DeFi protocols have been designed to be permissionless, anyone in any country can theoretically access them without regulatory compliance.
An international Financial system benefits the world economy by facilitating cross-border trade and investment in a way similar to that through which a national currency contributes to the national economy.
The excitement around fintech is not without merit. Fintechs are innovating at every step of the financial services value chain, often through new value propositions, including flexible products and better ways to address the financial challenges faced by low-income customers. They are making financial services more affordable and accessible. They are improving the customer experience of financial services and accelerating use and engagement. They are also building the groundwork—including easier digital identity verification, collaborative customer due diligence, data sharing, and payment schemes— that can catalyze a host of financial services.