Understanding the risks of using DeFi apps
When comparing DeFi vs. banks, it’s important to consider the risks posed by each method of investing, as well as the benefits that each one provides.
A note: Please kindly note that we do not provide investment, tax, legal or accounting advice; and this material has been prepared for informational purposes only. You should consult your own advisors before engaging in any transaction. You can find detailed disclaimers on Cenoa’s website.
Digital currency marketplaces, cryptocurrency savings accounts, and blockchain-powered DeFi apps are all part of a new way to grow your savings through fair yield wallets. For many decades, most saving opportunities were decidedly offline: people could save their funds through brick-and-mortar banks, through a stockbroker or financial advisor, by directly buying stock in a company, or by buying investment properties.
Today, DeFi apps and cryptocurrency have entered the playing field, and everyone from seasoned investors to everyday savers are tentatively starting to venture into the world of DeFi apps.
However, this new world of saving doesn’t come without its risks. We’ll get into the primary risks of DeFi and blockchain-based transactions, as well as the risks of investing with traditional banks.
Top blockchain and DeFi risks to know before you start
1. Volatile devaluation
Many platforms and cryptocurrencies see peaks and valleys in the value of user’s funds, which is why it’s often seen as a high-risk, potentially high-reward way to invest. But not all platforms work that way.
Even though every digital currency transaction carries some degree of risk, at Cenoa we try to minimize this as much as possible, while also allowing for different providers to enable guaranteed yield of your saving. For example, if you put $500 to be deposited with Cenoa, it is anticipated that the worst possible outcome is that you’ll get back 100% of the stablecoins deposited through that original transaction.
And since Cenoa allow you to protect your savings in stablecoins, the value of your funds is expected to be more stable — no crazy fluctuations like with other crypto currencies or with some of other countries’ currencies.
2. Locking periods
Many platforms require users to hold their funds within the platform for a predetermined locking period, meaning that if, for whatever reason, an investor wants to withdraw their money, they’re not always going to be able to.
Methods provided through super wallets like Cenoa have no locking period, so the smart contract allows you to withdraw your funds except in some unusual cases.
3. Regulatory issues
Many DeFi apps and blockchain-based investment platforms operate on a multinational level, and are believed to be outside of any governmental or brick-and-mortar bank oversight. However, you should always consult your advisors and understand local regulations you need to know about before making various types of transactions.
4. Cyberattacks and security breaches
DeFi apps and cryptocurrency operate in a relatively new space, which can leave platforms vulnerable to cyberattacks, hacks, and security breaches.
That’s why it’s so important that you trust the DeFi app you choose to work with, and choose a platform that prioritizes cybersecurity and frequent testing, and works with world-class security experts.
5. Smart contract risks
DeFi apps run on smart contracts, which are agreements built into the system’s code that outline how a transaction will work. Given certain conditions, an action will take place — for example, if an account reaches a certain savings threshold, they will automatically receive better yield. These actions are irreversible, even if you send money to the wrong person, for example.
Smart contracts run automatically, without human intervention, so investing with blockchain means placing your trust in the hands of the smart contracts, and ensuring that every transaction you make is exactly correct before you do it. Accordingly, you should always understand the smart contract and whether it provides you the anticipated outcome you have looked for.
What are the main risks associated with investing via traditional banks?
1. Low yield meaning low growth
In general, traditional banks only offer up to 2-3% yield on even high-yield savings accounts, while pocketing the rest of the profits generated by your investments.
A DeFi platform like Cenoa allows users to reach up to 8% yield, helping users grow their wealth much faster.
2. Local currency devaluation
Holding funds in local savings accounts can be tricky business when the economic situation of your country is uncertain or destabilized. Currencies can crash for many reasons, and global instability today has seen many currencies tank.
Saving your funds with smart contracts which you can access through Cenoa allows you to hold your funds in stablecoins, which are promised to be always redeemable 1:1 with the relatively strong and stable $USDC value.
3. Hacks and security breaches
Hacks and security breaches can happen to any banking institution, too. In fact, U.S. banks are more prone to cyberattacks, and risk for these types of security breaches is increasing year over year.
What is the safest way to invest using blockchain technology?
Know and understand who you’re working with. Do you trust the developers and executives that run your wallet app? Do you understand the smart contract terms?
Ask for clear information about security protocols and about potential for devaluation before depositing any funds.
Always keep apps up to date to ensure you’re always deploying security patches as needed.
Start small and trust your gut. You don’t need to dive into DeFi with both feet — you may start small and take your time before putting everything you have in one place. Learn and understand smart contracts, watch your crypto assets grow with great yields and decide how you want to proceed.
For a secure, trustworthy option, try the Cenoa Super Wallet and grow your wealth
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