Key Takeaways
- Fabian Schär, a DeFi scholar and professor, cautions against venturing into the sector.
- Cryptocurrency lending is a fast-growing DeFi field that offers high rewards with higher risks.
- The growing popularity of cryptocurrencies has attracted many novice investors with minimal knowledge of the market’s workings.
NEW DELHI (CoinChapter.com) — Decentralized Finance (DeFi) has become the new haven for juicy returns these days. However, traders often ignore the risks involved in the DeFi, observed Mr. Fabian Schär, a professor of blockchain and fintech at the University of Basel. He also warned that reckless investing might cause traders to lose everything.
All that glitters is not always worth investing
Crypto lending is gaining traction with traders looking for gains without playing the market. In detail, the term crypto lending refers to a form of DeFi, where investors lend cryptocurrencies to borrowers. The interest charged acts as an income for the lender. It is not that different from the concept of fiat-based banks.
Crypto lending offers interests ranging from 7-12% per annum, which is significantly higher than other savings instruments. Then there is yield farming- the practice of searching the DeFi world for best passive returns on crypto assets. However, traders may invest in obscure projects or coins in the hopes of getting higher yields. Often, these projects proffer interest rates in the thousands.
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Mr. Schär said that retail investors are running after these insane yields blindly. ‘They don’t understand what is going on behind the scenes,’ He commented. Although Decentralized Finance has quite a few benefits, the DeFi scholar warns against entering the sector only for gains. ‘You may lose everything,’ the professor warned.
Interestingly, crypto lending’s siren song has lured in even seasoned investors, who prefer earning interest to trying to outfox the market. But, unfortunately, even experienced traders can make a risky investment, highlighting the perils of the yield farm sector.
For example, Taz, a London-based trader’s recent investment of $10,000 in a yield farm, lost half its value in two weeks.
The cornerstone of yield platforms is similar to traditional banks, lending out customers’ digital cash at higher rates than what they offer to clients. However, there is little to no regulatory oversight on these platforms, which means no provision to protect customers from losses. DeFi also carries the risk of hacking, market volatility, and defective protocols.
The cautious bird gets the worm safely
Earning interest in crypto assets is not a new concept, but it recently gained popularity among traders as the crypto market struggles to recover from the May 19 market crash. Moreover, interest products provide another revenue stream for crypto hodlers.
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Many companies offer crypto lending facilities, such as the U.S based Gemini, which offers 7.4% interest. There’s also the example of a yield farm that offered 101,513% interest to users willing to stake Doge. However, converting these lesser-known tokens to more traditional ones involves paying a hefty fee, which takes quite a big bite out of the spectacular on-paper gains.
Another issue plaguing the crypto lending sector is a lack of transparency. Often, customers have no clue how the yield platforms use their money or tokens. Ryan McCall, CEO and co-founder of Zerocap, also pointed this out, saying, ‘One of the issues in the industry at the moment is the lack of transparency around lending.’ As such, it raises serious concerns regarding the safety of funds.
It is advisable to temper the desire for higher rewards with caution. Crypto lending and yield farming are lucrative options, but ‘There is substantial risk involved.’ as Mr. Schär observed.
