DeFi Risks

DeFi stakeholders are exposed to various DeFi risks, e.g., liquidations, de-peg, impermanent loss, and slippage risks that are specific to the underlying DeFi algorithm. The risk impact differs between the stakeholders and affects various levels of service customers, LPs, arbitragers, and governance users. Flash loans further amplify the losses of the victim and increase the profits of the attackers.

Rug pull

A rug pull is a malicious activity in which developers abandon the project and use the capital raised from the investors as a profit. It affects permissionless DEXs, which do not verify the listed tokens. At the interest rate protocols, crypto-backed stablecoins require the DAO vote to register new tokens as collateral, they are resistant to rug pull attacks. Bridges and liquid staking protocols depend only on the native tokens, which can not be rug-pulled.

Slippage risk

Slippage, the difference between the spot and realized price is a consequence of AMM, and therefore occurs only at AMM DEX. Slippage risk affects only users executing trades - service customers and arbitrageurs - and does not concern LPs. It depends on the size of the AMM pool and affects all token pairs. Slippage losses can be amplified by an MEV attack.

Impermanent Loss

Impermanent loss is a consequence of AMM. It affects only LPs to AMM DEX and services customers of yield farming protocols that employ liquidity provisions to AMM DEX in their strategy. Impermanent loss is amplified by cryptocurrency volatility and can be avoided by providing liquidity to the token pairs with equal or similar values: ısynthetic tokens targeting the same value (e.g., pair of USD stablecoins, SOL wrapped tokens), or synthetic tokens and their target tokens (e.g., native tokens and rebase liquid staking tokens).

Liquidation risk

Liquidation risk affects service customers of DeFi lending protocols - interest rate protocols and crypto-backed stablecoin - and is amplified by crypto-currency volatility. In case of market turmoil with high price volatility, it can also affect LPs when the too-late liquidation of the collateral will not cover the debt position.

De-peg risk

refers to the circumstances when the syn- thetic token loses the peg to the reference value. Consequently. It affects all holders of synthetic tokens - stablecoins, wrapped tokens (bridges), and liquid staking tokens. Particularly, it concerns LPs at DEX that provide liquidity for trading synthetic assets.