The crypto space has always been plagued by scams and bad actors just like any other financial market, because there are so many loopholes, newcomers, hidden risks, etc.
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When the mainstream crypto traders finally shifted using DeFi lending platforms for a change and better risk management, the number of Ponzi schemes shot up.Now the DeFi sector is considerably just as risky as crypto trading using traditional exchanges.
But there are still many legitimate and trustworthy DeFi lending platforms that offer a safe and hassle-free way to get crypto loans by making the right choices. In the following, we shall take a look at the risk in the DeFi lending sector and learn whether the DeFi lending platforms are a scam or not.
A few risks are associated with DeFi lending platforms
Although the theory behind DeFi lending seems perfect, there are still a few associated risks that one should consider:
- Flash loans
A Flash loan is a type of prevailing attack meant to create difficulty for Defi users. To pull off a flash loan, an attacker misuses the idea of flash loans. This allows borrowers to lend whatever amount they wish without capital. But if it is not paid back in full, the loan is reversed, causing the borrowed asset’s price to crash.
- Financial risk
One of the unique risks of Defi lending platforms is impermanent loss. By which one could lose a portion of assets given by their lender. As lenders receive a particular percentage of the Defi pool tokens. The total funds would mean receiving an unbalanced crypto amount, which is ultimately a kind of financial loss.
- Scaling risk
Costs for crypto transactions have been rising for a long time. And have reached a point where scaling options are introducing to fix the situation. According to experts, transaction costs have shot up on the Ethereum blockchain. This is why Defi has a long way to match the scale of its traditional counterparts.
- Regulatory risk
Defi lending is still in its nascent phase. And so regulators around the world are trying to figure out what to make of it. For this reason, most Defi lending platforms are not safe enough. To use as they lack appropriate certification and licenses to operate.
- Oracle risk
While Defi lending does not need intermediaries for processing loans. It depends on third parties for outside information, which is oracles. If an oracle connection disrupts for any reason. The lending contract depending on that oracle might fail and cause an oracle risk as a result.
- Smart contract risk
While we know that smart contracts are a self-executable set of agreements between two parties. DeFi’s being open-source is also common knowledge. It is possible that cybercriminals misuse the nature of smart contracts to cause economic exploits.
Defi lending is not like traditional lending in the sense that it is free from the control of third-party (bank) intermediaries. The lending platforms follow peer-to-peer lending.Where users have total control over expediting the loan process and also handle transparency for all parties involved, making it completely safe.
Is Defi Lending Platforms A Scam?
The crypto space has always been plague by scams and bad actors just like any other financial market because there are so many loopholes, newcomers, hidden risks, etc. When the mainstream crypto traders finally shifted to using Defi lending platforms for a change and better risk management, the number of Ponzi schemes shot up. Now the Defi sector is considerably just as risky as crypto trading using traditional exchanges.
But there are still many legitimate and trustworthy Defi lending platforms that offer a safe and hassle-free way to get crypto loans by making the right choices. In the following, we shall take a look at the risk in the Defi lending sector and learn whether the Defi lending platforms are a scam or not.
A few risks are with Defi lending platforms
Although the theory behind Defi lending seems perfect, there are still a few associated risks that one should consider:
- Flash loans
A Flash loan is a type of prevailing attack meant to create difficulty for Defi users. To pull off a flash loan, an attacker misuses the idea of flash loans. Which allows borrowers to lend whatever amount they wish without capital. But if it is not paid back in full, the loan is reversed, causing the borrowed asset’s price to crash.
- Financial risk
One of the unique risks of Defi lending platforms is impermanent loss, by which one could lose a portion of assets provided by their lender. As lenders receive a particular percentage of the Defi pool tokens, the total funds would mean receiving an unbalanced crypto amount, which is ultimately a kind of financial loss.
Regulatory risk
Costs for crypto transactions have been rising for a long time and have reached a point where scaling options are being introduced to fix the situation. According to experts, transaction costs have shot up on the Ethereum blockchain, which is why Defi has a long way to match the scale of its traditional counterparts.
Defi lending is still in its nascent phase, and so regulators around the world are trying to figure out what to make of it. For this reason, most Defi lending platforms are not safe enough to use as they lack appropriate certification and licenses to operate.
Oracle risk
While Defi lending does not need intermediaries for processing loans, it depends on third parties for outside information, which are oracles. If an oracle connection disrupts for any reason, then a lending contract depending on that oracle might fail and cause an oracle risk as a result.
Smart contract risk
While we know that smart contracts are a self-executable set of agreements between two parties, DeFi’s being open-source is also common knowledge. It is possible that cybercriminals misuse the nature of smart contracts to cause economic exploits.
Defi lending is not like traditional lending in the sense that it is free from the control of third-party (bank) intermediaries. Defi lending platforms follow peer-to-peer lending where users have total control over expediting the loan process and also handle transparency for all parties involved, making it completely safe.
