What are the risks of investing in DeFi? What are the benefits of investing in DeFi? DeFi refers to digital financial transactions without any intermediary between customers and financial services. It depends on the technology, transparency and authenticity of the blockchain. What are the risks and benefits of investing in DeFi? Now let's get to know.

What are the risks of investing in DeFi?

As DeFi is a relatively new technology, investors will have many questions before investing. Some new companies, especially start-ups, are coming to the fore in providing DeFi services, and people are worried about their performance.

DeFi relies on the power of basic programs or smart contracts, rather than central policies and human decisions. Although this is one of the greatest advantages of DeFi, there is still room for errors in programming, leaving a loophole for network attacks. Thankfully, DeFi insurance like Nexus Mutual is emerging to ensure the protection of tokens and transactions.

It is widely believed that secret taxation is complex and fast. Investors spend most of their time tracking, consolidating, reporting, and complying with accurate tax requirements. At present, DeFi seems to further aggravate this complexity, because different applications have different tax treatments.

Carpet pulling scams are common in DeFi, especially considering the novelty of this technology. It is always recommended to insist on using highly liquid DeFi tokens and a large number of cryptocurrencies on the platform to avoid such scams.

When you find a token that provides high returns for free, also known as frictionless production agriculture, you should be able to seize the pyramid plan of tokens with no long-term potential.

At present, DeFi is only applicable to a small number of individuals who understand the technology and how to use it. Compared with traditional financial services, smaller user groups result in fewer documents. The ready asset custodian has not yet appeared. It is gratifying to note that several developments around decentralized insurance are gradually emerging.

Individuals are concentrating their cryptocurrencies as collateral for those seeking some kind of security against the loss of other smart contracts. The premium shall be collected by the individual payer of the insured.

What are the benefits of investing in DeFi?

No matter what your initial or ultimate goal is to use DeFi, it is certain that decentralized finance has certain advantages over traditional finance. Some of them are:

Accessibility: DeFi is easier to obtain, especially for those who are unable to open bank accounts or have insufficient banking services to obtain loans. Only one Internet connection is required to access the DeFi platform, and there are no geographical restrictions or credit scores.

Low cost and high interest rate: with DeFi system, intermediaries will disappear completely. Therefore, both parties can deal directly without involving a third party. This helps greatly reduce transaction costs, in addition to allowing the parties to negotiate interest rates themselves. For the same reason, lenders enjoy better interest rates on DeFi than traditional financial networks.

Higher transparency and security: DeFi runs on the basic smart contract released on the blockchain. Records of all completed transactions are public and can be viewed by anyone. At the same time, the immutability of the blockchain general ledger means that no information can be tampered with.

Therefore, the DeFi platform provides dual advantages of security and transparency. The implementation of the smart contract can ensure the privacy of platform participants without disclosing your personal or sensitive financial information.

Function autonomy: DeFi platform is not affected or controlled by central financial institutions. This means that they also get rid of the interconnected nature of banks and governments.

The decline of the latter will not bring risks to the DeFi system. It will neither corrupt, nor over borrow, nor go bankrupt. This is possible because of the decentralized nature of the DeFi protocol.

conclusion

In general, the above content introduces the risks and benefits of investing in DeFi in detail. I hope it can help you. DeFi has been regarded as one of the most influential financial revolutions of our time, which will shape the future of money. As we know, it will continue to change traditional finance. In addition to helping reduce the functionality and transaction costs associated with extensive automation, DeFi also helps innovators develop new possibilities in the financial sector.