DeFi

The four biggest risks of modern DeFi

Published

9 months ago

1 May, 2024

Decentralized finance (DeFi) is experiencing new momentum. Activity in new ecosystems and high returns resemble the famous DeFi Summer 2021. The variety of innovative protocols makes it incredibly difficult for investors to keep up, while at the same time the impressive growth raises concerns about risks that are accumulating in the DeFi ecosystem.

You may have heard the doomsday analyzes comparing the most successful protocols of this wave, like Ethena or the Eigen Layer LRT, with risk management disasters like Terra, without really providing credible evidence of the parallels. The fact is that this new generation of fast-growing DeFi protocols is much more mature and a lot of thought has gone into risk management. However, there are still many risks.

Jesus Rodriguez, CEO of IntoTheBlock, is a speaker on the AI Stage at Consensus 2024from May 29 to 31.

The biggest risk in today’s DeFi market lies not in mechanical failures like those that caused Terra to collapse, but rather in three key factors: scale, complexity, and interconnectivity.

The protocols in this DeFi wave have become quite large in a matter of months, they enable more complex financial primitives, and they are incredibly interconnected. This combination of complexity, size, and interconnectivity has significantly exceeded the capabilities of risk models in today’s DeFi market. Simply put, there are many risk conditions in today’s DeFi markets for which we do not have credible risk models. And this gap seems to be growing instead of narrowing.

Risk has been part of the DeFi narrative since the beginning, and it is very easy to discuss in broad, generic terms. This new era of DeFi brings new innovations and has grown considerably quickly. As a result, risk takes on a different connotation than before. Taking a first-principles approach to analyzing risk in the DeFi era highlights four fundamental factors: scale, speed, complexity, and interconnectivity.

To illustrate these factors, consider the differences in risk quantification for a basic AMM with a few hundred million TVL versus an AMM that uses reinvested assets with their corresponding points systems and introduces its own tokens and points. The first risk model can be solved with basic statistical or machine learning methods. The latter enters the realm of much more advanced branches of mathematics and economics such as complexity or chaos theory, which are far from being applied in DeFi.

Let’s look at the different factors in more detail.

The principle of the relationship between risk and scale in DeFi is incredibly simple. In financial markets, modeling risk at a smaller scale, say a few hundred million, is very different from modeling risk at a few hundred billion. On a larger scale, risk conditions still appear that were not present on a smaller scale. This principle certainly applies to DeFi as a parallel financial system with many interconnected primitives.

Ethena is one of the most innovative projects in the current wave of DeFi and has attracted billions of TVL in just a few months. The biggest challenge for Ethena in today’s market is adapting its risk and insurance models to this scale in the event of negative financing rates for a long period of time.

The relationship between risk and speed is the traditional friction between growing too much and too fast. As a condition of risk, speed acts as an accelerator of evolution. A protocol that scales from a few million to a few billion TVL in just a few months may not have time to adjust its risk models to the new scale before unanticipated risk conditions arise.

The rapid rise of Clean diaper sparked a whole movement of LRTs, many of which reached several billion TVL in just a few months while still lacking basic features like withdrawals. The combination of speed and scale can exacerbate simple disaggregating conditions into truly impactful risk factors in some of these protocols.

The entire field of complexity theory was born to study systems that escape the laws of predictive models. Economic risk has been at the center of complexity theory almost since its beginnings, as global economies rapidly outpaced risk models after World War II. Modeling risk in a simple economic system is simply simple.

In the new wave of DeFi, we have protocols such as Pendle or Gearbox, which abstract away quite sophisticated primitives such as yield derivatives and leverage. The risk models for these protocols are fundamentally more difficult than those of the previous generation of DeFi protocols.

Widely interconnected economic systems can be a nightmare from a risk perspective, as any situation can have many cascading effects. However, interconnectivity constitutes a natural step in the evolution of economic systems.

The current DeFi ecosystem is much more interconnected than its predecessors. We have takeover derivatives in EigenLayer that are tokenized and traded in pools in Pendle or used with leverage in Gearbox. The result is that risk conditions within a protocol can quickly seep into different key building blocks of the DeFi ecosystem, making risk models incredibly difficult to construct.

Hacks and exploits have been the dominant risk theme in DeFi in recent years, but that could start to change. The new generation of DeFi protocols is not only more innovative but also much more robust from a technical security point of view. Audit firms have become smarter and protocols take security much more seriously.

As an evolving financial system, the risk of DeFi appears to be shifting from technical to economic. Rapid, large-scale growth speed, increasing complexity, and deep interconnectivity are moving DeFi into unforeseen territories from a risk perspective. With only a handful of companies working on risk in DeFi, the challenge now is to catch up.

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DeFi

If You Missed BONK and PEPE This Year, This Viral New Crypto Might Be Your Salvation

Published

6 months ago

29 July, 2024

CoinFlix Staff

If You Missed BONK and PEPE This Year, This Viral New Crypto Might Be Your Salvation

Bonk and Pepe appear set to net new investors 10x to 100x returns over the next 12 months. However, cryptocurrencies in the DeFi play-to-earn gaming sector could offer even greater returns. As August approaches, Rollblock is emerging as a standout DeFi play-to-earn gem with the potential to 100x-1000x gains in the fourth quarter and beyond.

The project features an innovative revenue sharing model and exceptional accessibility, attracting players and investors. Additionally, Rollblock’s extensive game library of over 150 titles and enhanced sports betting are further driving excitement for the platform. Cryptocurrency analysts are expecting a sudden surge in demand. 800% a push for Rollblock from the beginning of September.

Bonk remains strong despite market fluctuations

While most well-known cryptocurrencies struggled throughout July, Bonk remained strong. As one of the highest-grossing meme cryptocurrencies of 2024, Bonk rose over 24% in July, while most cryptocurrencies experienced negative fluctuations.

Investors looking to add a relatively safe memecoin to their portfolio should consider Bonk. While Bonk is unlikely to generate explosive gains of 250x to 1,000x from here on out, Bonk could still theoretically provide returns in the 20x to 100x range.

Pepe should see a big rise in the next bull run

Alongside Bonk, Pepe has yet to go through a bull run. This means that there are still substantial gains to be made from Pepe over the next 12 months.

Pepe is down 4% in 30 days, but that shouldn’t worry Pepe investors in 2024. Experts believe Pepe’s best days are still ahead, with crypto analysts predicting a 10x to 50x surge in the next election cycle around November.

In the long term, Pepe could surpass the 100x mark for today’s investors. However, Pepe is a memecoin, and one should exercise caution when investing in purely speculative assets that have no utility.

Rollblock’s Unprecedented Hype Potential Could Push It Past 100x Valuation in Q4

Rollblock is a GambleFi Play-to-Earn token that integrates centralized and decentralized gambling on a single platform. By allowing players to earn rewards through active participation and gameplay, the platform creates a compelling incentive structure that appeals to both casual and competitive players.

With its cutting-edge blockchain technology, Rollblock offers top-notch security that keeps bets and transactions on the platform secure. The platform’s lack of KYC mandates appeals to both users who value anonymity and security.

Rollblock’s revenue sharing model, which allocates up to 30% of casino revenue to RBLK token holders, is a major draw for investors. The model involves burning half of the repurchased tokens and distributing the other half to stakers, increasing the token’s value and encouraging long-term investment.

The platform is also constantly evolving thanks to user feedback which has enabled updates such as the upcoming sports betting feature within the platform’s casino. This addition will complement Rollblock’s extensive game library of over 150 titles, ranging from traditional poker to innovative blockchain-based games.

RBLK is expected to emerge as one of the leading DeFi tokens in 2024. With a price of $0.0172 with impressive growth potential and over 140 million tokens sold recently, Rollblock is on track to enter the top 100 cryptocurrencies by Q4, making today a lucrative time to buy RBLK tokens.

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Fuente

DeFi

Cryptocurrency sector is experiencing ‘most misjudged moment’ since 2020, says venture capitalist Arthur Cheong

Published

6 months ago

29 July, 2024

CoinFlix Staff

Cryptocurrency sector is experiencing ‘most misjudged moment’ since 2020, says venture capitalist Arthur Cheong

Veteran cryptocurrency investor Arthur Cheong believes the digital asset sector offers long-term holders a golden opportunity.

Cheong, the founder of DeFiance Capital, tell His 171,700 followers on social media platform X indicate that he believes decentralized finance (DeFi) is hugely undervalued.

According to Cheong, DeFi projects are innovating at a rapid pace and leaving traditional financial (TradFi) companies in the dust.

“It’s been a long time since I’ve been this excited about the risk/reward and potential upside of DeFi. This is probably the most misjudged moment since the pre-DeFi summer of 2020, with extremely promising prospects.

I see opportunities not only in OG (original) DeFi, but also in some newer projects that are evolving rapidly and growing at a pace that fintech startups will do anything to match.

The veteran investor also believes that crypto is now here to stay following recent launch from the Ethereum spot market (ETH) exchange-traded funds (ETFs) last week.

“Overall, the floodgates are open and there is no turning back. TradFi asset managers will continue to launch new crypto products because, guess what: there is huge demand for them!”

I expect them to launch actively managed crypto ETFs [in the] coming years. ”

Earlier this month, Cheong laid that it might be a bad strategy for cryptocurrencies to seek mass adoption, believing that digital assets are designed to disrupt several key financial sectors.

“I think we should accept that cryptocurrencies may not be suited for mass adoption like Web2, but rather are optimized for some narrow but very high-impact use cases like stateless global money, cross-border payments, and decentralized finance.

Chasing mass adoption of normies may be chasing the wrong Grail from the start.

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