As with most things in the financial world, when something promises extremely high rates of return there’s usually a catch. DeFi lending is no exception.
To put it simply, DeFi, shorthand for decentralized finance, is an ecosystem of blockchain-based applications that offer a range of financial services similar to those provided by traditional banks, insurance brokers, and other financial intermediaries. The main difference being, these decentralized applications, known as dapps, run autonomously without any third party acting in the middle. That’s because each dapp is powered by a smart contract – a special computer program that automatically performs a function when certain predefined conditions are met.
Crypto lending is just one type of traditional financial service that is now accessible through these peer-to-peer operated dapps. Similar to depositing funds into a savings account to receive interest payments, crypto investors can now lock up their funds or use them to provide liquidity across a range of decentralized platforms and receive regular interest payments.
Many of the interest rates offered on these dapps are significantly greater than anything currently available in the traditional financial space, making it a highly attractive passive income stream for crypto holders. But before lending any assets, there are a number of associated risks everyone should be made aware of.
When you commit your assets to a liquidity pool, you risk…