The post Understanding and managing economic risks in DeFi appeared on BitcoinEthereumNews.com.

The following is a guest article from Vincent Maliepaard, Marketing Director at IntoTheBlock. Economic risks have led to nearly $60 billion in losses across DeFi protocols. While this number may seem high, it only reflects losses at the protocol level. The actual total is likely much larger when factoring in individual user losses due to various economic risk factors. These personal losses often arise from volatile market conditions, complex inter-protocol dependencies, and unexpected liquidations. Understanding Economic Risk in DeFi Economic risk in DeFi refers to the potential financial loss due to adverse movements in market conditions, liquidity crises, flawed protocol design, or external economic events. These risks are multi-faceted and can stem from various sources: Market Risk: Volatility in the value of assets can lead to significant losses. For example, sudden price drops in collateralized assets can cause liquidation events, leading to a cascade of forced selling and further price drops. Liquidity Risk: The inability to quickly buy or sell assets without causing a significant impact on the price. In DeFi, this can manifest during a market sell-off when liquidity pools dry up, exacerbating losses. Protocol Risk: This risk arises from flaws or inefficiencies in the design of DeFi protocols. Impermanent loss, oracle manipulation, and governance attacks are examples of how protocol-specific risks can materialize. External Risk: Factors outside the protocol such as actions by large market players or changes in macro rates and conditions, can introduce significant risks that are often beyond the control of users or a protocol. The Layers Within Economic Risk In DeFi, economic risks are pervasive, but they can be understood on two distinct levels: protocol-level risks and user-level risks. Distinguishing between the two helps users better define the risks that affect their strategies and monitor key signals to take preventative action. Protocol Level Risks…

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Filed under: News - @ October 19, 2024 10:03 pm