DeFi (decentralized finance) is an extremely new and exciting space, offering an endless amount of opportunities for those who take advantage of them and understand how to navigate its waters.
But with these opportunities comes tremendous responsibility, particularly in picking safe solutions and taking extra precautions. Whenever you interact or engage within the blockchain and DeFi ecosystems, your tokens are at risk of being hacked or stolen. Plenty of malicious actors is out there looking to steal your hard-earned assets, whether they be hackers or even projects themselves.
When it comes to mitigating risk in DeFi, we’ve come up with two different paths you can take: the “Do It Yourself” method or using Coinchange account. Let’s take a closer look at the pros and cons of both so you can decide for yourself which is best for you.
The “Do it Yourself” Method
One of the beauties of cryptocurrency is the autonomy it provides to users - we’re now able to control how we store our funds, essentially becoming our own bank. But DeFi can often be a complex and challenging space to learn and navigate, especially if you’re new.
Remember, while DeFi lets you control your finances, it also places the full burden on you. When interacting with dApps (Decentralized Applications), if something goes wrong, there’s virtually no protection for your assets and no customer support to call.
Here are some of the risks and associated solutions when interacting with DeFi on your own:
Countless Transactions and High Fees
Users who use DeFi often seek to receive the highest rates available. But each protocol always has fluctuating APYs for their respective assets, depending on market conditions and supply/demand. This means that in order to get the best rates, you’ll need to actively manage your yield-farming position by rebalancing your portfolio across different protocols while constantly monitoring the health of your positions to avoid losing it all.
To do this, you’ll need to pay hefty fees for transferring, swapping, and withdrawing assets - with Ethereum’s current high gas fees, you can end up paying hundreds of dollars to simply move assets from one application to another. For most, this ends up being far too expensive and time-consuming.
Smart Contract Vulnerabilities
As previously mentioned, with any smart contract application, there lie vulnerabilities in the code that could be subject to malicious hacks. Therefore, you need to make sure you do your research to ensure you’re picking trustworthy entities.
Doing this, however, results in hours of your time to verify audit reports, codes, security that’s been put in place, and much more.
Verifying the Project’s Team
Whenever you use a protocol or application, you need to make sure that the team behind it is legitimate, established, and public. The cryptocurrency market is known for its constant scams and rug pulls, so doing some research on the people behind the project is crucial.
Liquidity and Financial Risk
Certain protocols fall short when it comes to the available liquidity - although they may list certain tokens, it doesn’t mean you’ll be able to smoothly and seamlessly trade them. You may end up incurring high slippages, not being able to exit your position, getting liquidated, and more.
To solve this problem, you’ll have to research and really understand which tokens are liquid and which aren’t together with their associated risks, while constantly monitoring your portfolio closely for those liquidity events, costing you time and energy.
Market and Custody Risks
When you choose to participate in the DeFi market, you expose yourself to market risk, potentially unpredictable market dumps, impermanent loss, and more. In order to cope with this and prepare yourself, you need to become a disciplined investor and research and develop strategies to deal with these inherent consequences.
Moreover, when using a DeFi protocol, you need to have a wallet to store your funds, whether it’s a Web3 or hardware wallet - you’ve been given the power of holding your own crypto assets. But that means you’re fully responsible, so be wary of losing your private keys or software becoming buggy. You need to make sure you understand how to use your wallet of choice and keep your funds secure, but regardless, there’s always a risk of losing them since there’s no third-party custodian allowing you to recover lost funds via customer support.
The team at Coinchange has built a powerful product that allows you to buy popular cryptocurrencies and earn APY on them via Earn Account. Using our application provides an attractive alternative to the “Do It Yourself” method for a variety of reasons.
We solve the transaction fee issue by eliminating it for our users. That’s right - you don’t pay anything, meaning you save money and don’t have to worry about those high Ethereum gas fees. Our platform also leverages a powerful algorithm that constantly monitors and aggregates data across the top DeFi protocols to always provide high earning rates on your transferred tokens.
When it comes to assessing DeFi-related risks, such as those associated with smart contract vulnerabilities, operational concerns, financial and liquidity risks, and market volatilities, we use a high-quality protocol evaluation and risk assessment framework to ensure the underlying protocols used in the Earn Account strategies are safe, allowing an optimized risk/reward ratio. The risk assessment framework includes factors and processes such as research on various sectors, allowing us to uncover new trends and protocols to diversify strategies’ risk exposure; protocol screening and risk assessment of smart contract vulnerabilities, operational risk, liquidity/financial risk, and market risk. Based on the relative risk result, we create recommendations and restrictions to ensure one of the best risk management practices.
Coinchange also implements risk mitigation at the strategic level. On top of the risk assessment for smart contract vulnerabilities, the strategies used by the DeFi algorithm are spread across blockchains to ensure diversification while following guidelines and restrictions set on fund allocation. To mitigate operational risk, the algorithm is integrated at the smart contract level and follows the protocol's official documentation - our development team keeps in touch with the protocol’s security department to resolve any issues that may arise. Liquidity and financial risk are mitigated via a constant monitoring of positions’ health and automatic management/rebalancing, plus automatic withdrawal to avoid liquidity crunches together with order aggregation.
Our DeFi algorithm uses tailor-made strategies that negate market risks by deploying hedging mechanisms or stablecoin-only pools, which have no market risk. To further minimize market risk, the DeFi algorithm also constantly monitors position health and receives price feeds from the blockchain without counterparty risk.
So what does this all mean for you? When you use Coinchange’s Earn Account, your assets are being put to work in one of the best and safest protocols in the industry. We create a completely hassle-free experience that provides you with all the bells and whistles - access to the benefits of DeFi coupled with a secure platform that you can trust, all while reducing your risk in the overall market