It seems like the decentralized finance (DeFi) space is buzzing and the craze is drawing interest and capital from every corner in 2020. In the latest cryptocurrency news, we have the CEO of BitMEX Arthur Hayes outlining the four risks that are found in Ethereum’s DeFi “proto banks.”
For those of you who don’t know, Hayes adamantly calls Ethereum “a sh*tcoin” and recently forayed into yield farming. He released an extensive blog post to BitMEX’s company blog entitled “Dreams of a Peasant” where he outlined his thoughts on the ongoing DeFi craze.
Hayes noted that the craze could definitely drive large amounts of capital into Bitcoin and crypto. He also remarked that there are many clear risks in using these decentralized finance protocols. He shared the blog post on his Twitter profile.
— Arthur Hayes (@CryptoHayes) August 27, 2020
As the CEO of BitMEX Arthur Hayes noted in the ETH news, there have been many extraordinary opportunities to obtain returns on one’s investment in DeFi lately. There will and still are legitimate opportunities that yield hundreds of percent or thousands of percent per year, according to him.
However, he also said that the yields do not come without risk. In that manner, he outlined four key risks to the DeFi “yield farming” and cited what he calls “DeFi proto-banks” (a term he used to describe lending projects such as Aave) in the blog post. They are as following:
- First of all, if you decide to buy a DeFi token that is should yield dividends from fees captured by the protocol and that token declines, you may lose your money despite the dividends.
- Second of all, the loan book “takes impairment,” meaning that loans are not liquidated correctly due to liquidity, thus leaving depositors at a loss.
- Third of all, there could be defaults if undercollateralized loans are introduced and borrowers don’t have the ability to pay back loans. Undercollateralized loans are something that Aave is testing out right now.
- Lastly, a situation where a crypto hack takes place. “That is the result of an intentional or unintentional bug in the smart contract code that syphons assets out of the project, or they become inaccessible.”
Hayes also spoke about the future of this space, citing that despite all, there is room for growth.
“When faced with severe income inequality, and free money (for the fortunate), financial speculation will surge. Would you rather work for 30 years for stagnant to negative real income gains in service to a mega-corporation, or would you rather come play in the intellectual casinos that are the financial markets?”
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