Although the DeFi industry might provide tempting APYs, there are risks involved. You are effectively using financial services even though they are decentralized, and some of the hazards are well known:
1. Counterparty Risk: You run the risk of the counterparty defaulting on their debt if you participate in crypto loans or any other type of lending.
2. Regulatory Risk: It can be challenging to determine whether certain services and projects are legal. Your money may be at danger if you invested in a smart contract that is subsequently terminated due to legal issues.
3. Token Risk: The level of risk associated with each asset you own varies depending on its liquidity, dependability, token smart contract security, associated project, and team. The DeFi pace has a large number of tokens with low market caps, therefore token risk can be particularly significant.
4. Software Risk: Security of the smart contracts you’ve invested in may be compromised by code flaws. Additionally, connecting to DeFi DApps and granting them particular permissions could lead to the compromising of your wallet.
5. Impermanent Loss: If you stake in liquidity pools, divergences from the price ratio at which you entered will result in a temporary loss of some of the tokens you deposited in the pool in the event that you withdraw.