Risks of investing in DeFi
Using Stake DAO and investing in DeFi (Decentralised Finance) comes with risks that any potential investor should be aware of.
Here is a non-exhaustive list of the different risks that can be encountered. It is advised to read and understand the following list before depositing any money into a DeFi protocol.
Although all possible measures have been taken to ensure the safety and security of users’ funds within Stake DAO, some inherent risks will always remain.
Stake DAO is fully decentralised from launch. This means users are interacting directly with the smart contract.
Smart Contract Vulnerability
Smart contract security has come a long way since its infancy, but it would be irresponsible to claim that security does not remain a major issue for smart contracts and dapps (decentralised applications). Hackers still find opportunities to steal cryptocurrency and exploit vulnerabilities in smart contracts as they are deployed to various networks.
Investors should take the time to research any given DeFi product before they invest their funds.
Things to look for before investing:
The experience, or identity, of the developers behind the project. It's not unusual for developers of cryptocurrency projects to remain anonymous, but knowing the identity of the person or team behind the project can provide useful insight when researching a given protocol.
Completed security audits (although audits do not guarantee the smart contract cannot be hacked).
Reputation of the project - users should always do their own research.
As with traditional financial markets, crypto and DeFi prices are volatile. These changes in price can be quite significant, and a DeFi investor should be comfortable living with these sudden price moves, whether positive or negative for the investor.
Stake DAO and the products it interacts with are fully decentralised. This means that users are fully responsible for their own funds. If users somehow lose access to their Crypto wallet, nobody can help them regain access. This risk can be reduced by safely storing the wallet private keys offline, or by using the Stake DAO email login feature.
If you are buying crypto using EUR or GBP and intend to keep part of it in stablecoins (tokens which are not volatile in price, usually pegged to USD), you will be exposed to an FX risk. Therefore, if the USD decreases in price, your stablecoins will be worth less when converted back to EUR or GBP.