Decentralised finance (DeFi) is a financial system built on blockchain, eliminating the need for intermediaries like banks. DeFi protocols offer high yields on cryptocurrency deposits, which can be enticing but also risky. These yields are generated from transaction fees and interest paid by borrowers who use the protocols to take out loans.
However, there’s a catch. The high yields are often temporary, diminishing as more people deposit their crypto. Additionally, the yields can be misleading as they are often quoted in the protocol’s native token, not in a stable currency. This means that while the yield may appear high, the value of the token can fluctuate, negating any potential gains.
Moreover, DeFi protocols are vulnerable to smart contract bugs and hacking. In 2020, DeFi protocols lost $120 million due to these issues. The high yields are also partly due to the high risk involved.
In conclusion, while DeFi yields can be attractive, they come with significant risks. These include the volatility of the protocol’s native token, the temporary nature of high yields, and the susceptibility of DeFi protocols to bugs and hacks. Therefore, potential investors should exercise caution and thoroughly understand the risks before investing in DeFi protocols.
Go to source article: https://every.to/almanack/defi-yields