MonoX Finance got robbed off of $30 million worth of WETH and MATIC in the latest DeFi Attacks of 2021
What is Decentralized Finance (DeFi) ?
Decentralized Finance (DeFi) is a new emerging financial technology based on non-custodial secure distributed ledgers like those used in cryptocurrencies. The distributed system removes the tight control which banks and institutions currently hold over money, financial products, and financial services. The term DeFi short for Decentralized Finance was first unearthed in August 2018 from within a Telegram chat between Ethereum developers and entrepreneurs including Inje Yeo of Protocol, Blake Henderson of 0x and Brendan Forster of Dharma.
Some of the key features about DeFi include:
- The ability to transfer funds in a matter of seconds and minutes.
- Anyone with an internet connection can use it without needing approval (KYC).
- You hold your digital assets on a secure non-custodial distributed ledger instead of in a bank.
This new decentralized financial system takes advantage of new emerging technologies to remove third parties from financial transactions and is built from using components such as software, stablecoins, and hardware which in return enables the ability for development of applications.
The most interesting part about decentralized finance is that the infrastructure for DeFi and its regulation are still under development and debate with members of the community deciding where this technology takes us.
Traditional financial centralized services represent more flexibility than decentralized services when turning fiat to cryptocurrency and vice versa. However, as this emerging technology continues to grow and more clarity surrounding DeFi is unveiled we can expect more on-ramping. Which will see people leave the traditional monetary system, and enter the decentralized, blockchain ecosystem instead.
Why is Decentralized Finance (DeFi) so important?
The goal of DeFi is to create an open financial market that is truly trust less and permissionless using DeFi protocols. With many of these projects like Yield.app for example you are also able to earn a passive income through DeFi. You can deposit your cryptocurrency onto a platform or protocol that will pay you an APY (annual percentage yield) for it.
Is DeFi worth investing?
At the start of 2021, DeFi tokens were all the rage; however, heading into the new year. Many tokens have underperformed comparatively to Ethereum, Solana and other layer 1 blockchains. Given their unique use cases, buying reputable tokens now may present a good buying opportunity over the long term. Crypto assets are only going to get bigger and be in more demand and starting off with reputable tokens is a great start. Many of these exchanges accept credit card payments.
What can be earned in the DeFi space?
The overall volume has been growing rapidly over the last two years. According to dApp Total, the total value participating in the space as of Sep 30, 2019 is $997 million up from $219 million one year ago, Taking that into account we could estimate that as of writing that the total value participating in the space would be in the billions. Finance Monthly reports at the start of 2022 the total value participating was $200 billion. The yield that can be earned in this new market can reach levels as high as 5% per month even without taking a market risk toward the new field of cryptocurrencies. Maker DAO is one of the largest DeFi platforms. The platform allows users to lock Ether into smart contracts as collateral to secure loans in DAI. Since DAI is pegged to the USD, investors can prevent market risks.
Risks of DeFi
- Intrinsic Protocol Risk
DeFi platforms automate specific financial primitives in the form of smart contracts. The dynamics of these protocols are one of the most important dimensions of risk in these applications.
- Exogenous Protocol Risk
Attacks exploiting the underlying mechanics of protocol such as oracle manipulations, flash loan exploits or attacks that take advantage of bugs in the smart contract logic are prominent examples of this category.
- Governance Risks
A unique aspect, decentralized governance proposals control the behaviour of a protocol and, quite often, are the cause of changes in the liquidity composition in affecting investors.
- Underlying Blockchain Risk
DeFi protocols take a level of infrastructure dependency on their underlying blockchain. Compromising aspects such as the consensus mechanism on specific blockchains can materialize into vulnerabilities on DeFi protocols running on that platform.
- Market Risk
Investments into non-stablecoin AMM pools are vulnerable to loss if the price of the asset diverges drastically from the time when the liquidity was supplied to the pool.
Is DeFi growing?
Decentralized finance is booming, with the total value of assets deposited in transactions having risen from $700 million in December 2019 to over $200 billion at the beginning of 2022, equivalent to Greece’s 2017 GDP.