The decentralized finance (DeFi) space could easily be the most successful offshoot of the traditional crypto industry. None other has seen the type of growth it has this year. While the total value locked inches closer to record levels, the risks to DeFi remain prominent. However, a new report is shedding a new perspective on things.
Earlier this week, data and research company BraveNewCoin (BNC) reported that the DeFi space currently has some non-financial risks to contend with as it works its way to mainstream adoption.
The primary risks for DeFi aren’t uncommon. While the industry has grown, many understand that doing business in a decentralized environment always poses threats to investors’ funds locked in DeFi protocols.
However, the BNC report explains that some of the industry’s risks could also be tied to non-financial factors. Most prominent is the issue of scalability, which appears to follow just about any crypto concept.
Right now, most DeFi protocols are hosted on the Ethereum blockchain. Admittedly, it is the most famous blockchain platform and provides some of the best developer tools available. Data from DeFi Prime shows that there are 198 projects on the blockchain – almost ten times the number of projects on blockchains like EOS and Bitcoin.
As BNC explains, network congestions will eventually lead to higher gas prices and an increase in the number of failed transactions. These will affect the protocols’ operation. The report highlighted the Black Thursday event in March, when Ethereum transaction fees hit $15, and MakerDAO liquidators were unable to access auctions to bid.
Par for the Course
Another primary concern is the issue of a reentrancy attack. These attacks are relatively common to Ethereum, and they involve a contract sending tokens before updating its internal state. Hackers could exploit these to change contracts’ conditions while in execution and divert funds.
There is also the threat of smart contract oracles. These platforms serve as links between a smart contract and the outside world, providing it with off-chain data that it needs to be executed. When an oracle gives incorrect data to a smart contract, the latter will inevitably malfunction.
BNC added that cybercriminals could also manipulate DeFi protocols’ designs, and there is always the risk of centralization – where one central intermediary or a few whales control a protocol.
It has been a whirlwind year for the DeFi space already. Investors have seen many of these risks manifest time and again. However, these are essentially growing pains for the industry. The traditional crypto space didn’t get here in one day as well. Hacks and security breaches have cost investors billions already.
While these risks cause project developers to do better, the truth is that they will always be here. The only issue that looks solvable is network congestion, which can be solved by the rise of other competing blockchains and developers’ willingness to move from Ethereum. As long as DeFi remains technical, most of these risks won’t leave.