Risks are inherent to all financial sectors, and decentralized finance (DeFi) is no exception.
The most common forms of financial risk in traditional finance (TradFi) include credit risk, liquidity risk, asset-backed risk, foreign investment risk, equity risk, and currency risk.
While some of these risks may be present in DeFi, the industry largely has its own unique risks, and a recent report by digital asset investment firm CoinShares highlighted seven of them.
Volatility
First, crypto is extremely volatile and users need to consider this when evaluating their collateral or the value of a decentralized app (dapp)’s treasury. This explains why over-collateralization is a normal practice in DeFi.
It also explains why DeFi protocol Compound Treasury has received a credit rating of B- from major credit rating agency S&P Global Ratings. The agency cited the uncertain regulatory regime for stablecoins, stablecoin-to-fiat convertibility risks, and the Treasury's "limited capital...
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