Vitalik Buterin: People Are Underestimating DeFi Risks

A few well-known people in the cryptocurrency community have laid out concerns about the dangers and risks involved in investing in Decentralized Finance (DeFi). One of such persons is the co-founder of the Ethereum blockchain, Vitalik Buterin.

In a recent interview with Unchained, Buterin mentioned why people should not fully trust the DeFi smart contract considering the risks involved and why they shouldn’t rush into it or advocate for it due to the temporary advantages of the sector.

Not yet for regular people

In explaining what people should consider while investing, he used a tweet from a year ago where he mentioned that most people would preferably pick making a 4% interest from a DeFi protocol than a 2% interest from a Centralized Finance like traditional banks (probably on a fixed deposit).

But what these people fail to consider, dwelling on the fact that most DeFi projects are audited, is the chance of that “4% system” breaking. If that “4% system” has a 5% chance of breaking, then that investment is not wise, typical in DeFi protocols. 

Talking about the risks of the DeFi protocols, he said, “Are we safe enough that we can promise a chance of breaking of less than 2% a year? I don’t think we can get there yet.” He continued, “DeFi is still fine, but don’t act like its a place where you should advocate for a lot of regular people to put their life savings into.”

Buterin also pointed out that to avoid disappointment in DeFi projects, investors should go into DeFi to escape certain risks common with the traditional banks like the inflation of currency or the government seizing a person’s funds. But most investors go into DeFi to get more interest rates on DeFi protocols than what is obtainable on traditional bank accounts. However, it would be safer for people to buy stablecoins.

Yield farming

One of the seemingly temporary advantages of the DeFi that people shouldn’t necessarily plunge into is the new buzz word in the crypto industry and the DeFi community, Yield Farming. 

 Yield farming is an innovative way to earn passive income on the Ethereum blockchain. Investors could make Annual Percentage Yields (APY) of up to 100% like in the distribution of the Compound Finance governance token (COMP).

Temporary perks

In the interview, the Ethereum co-founder warns, “We should not necessarily be treating a kind of temporary advantages that we have now as things that we should be pushing out in front of the entire world or as reasons why everyone should get into DeFi.”

He continues, “because if you push them out to the entire world then by the time people start getting into DeFi, these kinds of temporary advantages are not going to be there anymore.”

Another popular crypto figure who expressed concerns on the DeFi is Charlie Lee, the founder of Litecoin. In a recent article published by Coinfomania, Lee mentioned why it is almost impossible for DeFi projects to achieve true decentralization while saying that he is not very optimistic about the success of decentralized finance. 

At the time of writing, the total value of USD locked in DeFi stands at $3.71 billion, which is more than 300% growth since the start of 2020.

See Also: Top 10 DeFi Apps to Look Out For in 2020