New Study Shows Non-Financial Risks for DeFi

The traditional cryptocurrency industry’s most successful offshoot is none other than the decentralized finance (DeFi) space. There is no other that has experienced the kind of growth it has in 2020. The total value locked is inching close to record levels, but this doesn’t mean that the space is without its risks. A new report has provided a new perspective about the risks to the DeFi space. BraveNewCoin (BNC), a data and research company, reported earlier this week that there are some non-financial risks that the decentralized finance space has to contend with, as it is making its way towards mainstream adoption. The primary risks to this space are not very uncommon. 

Even though the industry has experienced growth, many are aware that there will always be threats to investors’ funds that are locked in DeFi protocols, as they are doing business in a decentralized environment. However, the BNC report indicated that there could also be some non-financial factors that are a threat to the DeFi space. The issue of scalability is the most prominent one, which seems to be following just any crypto concept. Currently, most of the protocols in the DeFi space are hosted on the Ethereum blockchain. 

There is no doubt that it is the most renowned blockchain platform and comes with some of the best developer tools. According to data by DeFi Prime, the blockchain has a total of 198 projects, which is ten times the number of projects on blockchains like Bitcoin and EOS. According to BNC, gas prices will increase due to network congestion and will result in more failed transactions, thereby affecting the operation of the protocols. The report also discussed the Black Thursday event that had occurred back in March, when the transaction fee on Ethereum had reached $15 and auctions for bidding couldn’t be accessed by MakerDAO liquidators.

A reentrancy attack is another issue, which has become a concern, because these attacks are common on Ethereum and there needs to be a contract sending tokens before its internal state is updated. These change contracts’ conditions could be exploited by hackers while they are in execution, allowing them to divert funds. Smart contract oracles are also a threat because platforms work as links between the outside world and smart contracts. They provide it the off-chain data it needs for execution. If the smart contract receives incorrect data from the oracle, it will eventually malfunction.

BNC disclosed that designs of DeFi protocols could also be manipulated by cybercriminals and a risk of centralization also exists, where a couple of whales or a central intermediary controls the protocol. The year has already been a whirlwind one for the DeFi space. A number of these risks have manifested time and again, but these are mostly growing pains for this new industry. It took time for the traditional crypto industry to reach where it is today and security breaches and hacks have already cost billions. While these drive project developers to do better, they will always exist.