Recently, the global cryptocurrency exchange Crypto.com conducted an in-depth analysis of how blockchain-based decentralized finance protocols operate and the structure by which users earn profits. The report points out that while DeFi offers high yields, it also comes with various risks such as smart contract vulnerabilities and high volatility, emphasizing that investors need to adopt a more cautious attitude.
DeFi is a technology that enables automated financial transactions on the blockchain without intermediaries, providing traditional financial services functions such as lending, trading, and asset management in a permissionless manner. This technology particularly utilizes Ethereum's smart contract technology to create a structure that executes automatically when conditions are met, allowing anyone with internet access and a virtual asset wallet to participate.
According to research by Crypto.com, the profit model of DeFi protocols is mainly divided into △ trading fees △ lending interest △ liquidation fees △ performance fees, etc. For example, decentralized exchanges like Uniswap, SushiSwap, and Curve charge an average fee of 0.01% to 0.3% per transaction, and this revenue is distributed to liquidity providers or accumulated in the protocol treasury. Lending protocols like Aave and Compound distribute earnings by paying interest to depositors, while automated yield optimization platforms like Yearn Finance and Beefy Finance charge a performance fee based on a certain percentage of the managed assets.
This DeFi structure can offer relatively high yields, which are attractive to users. Crypto.com research points out that DeFi interest yields are usually much higher than traditional bank deposit rates of 1% to 2%, reaching over 5% to 20%, but yields can change with market conditions at any time, and there are risks of actual returns decreasing or losses occurring due to price volatility, insufficient liquidity, slippage, and other factors.
The most prominent risk factor is the vulnerability of smart contracts. Since DeFi operates based on code, it is susceptible to hacking, vulnerabilities, cross-chain bridge issues, oracle problems, and other challenges. A typical case includes the Ronin Network hack that caused a loss of $600 million. Additionally, impermanent loss generated in automated market maker structures and extreme slippage of low liquidity tokens are also pointed out as factors to be cautious about.
Market participants should also pay attention to the transparency advantages of DeFi. Most fee structures, interest rates, protocol activities, etc., are recorded on the blockchain and can be viewed in real-time through blockchain explorers. However, it is necessary to consider the invisible indirect costs such as gas fees on networks like Ethereum, harvest fees on certain platforms, and costs associated with insufficient liquidity.
Crypto.com research suggests that while DeFi is undoubtedly a significant advancement in financial inclusion and automation, users should decide whether to participate only after a comprehensive analysis of various risks. In particular, one should not chase high returns alone but should choose protocols with high credibility, considering factors such as address verification status, audit history, and community levels, and may consider purchasing insurance if necessary.
Crypto.com research emphasizes that DeFi is gaining attention as an alternative to traditional financial structures, and it has the potential to evolve into a more sophisticated and stable ecosystem if more institutional investors and entities enter. However, there is always underlying technical complexity and regulatory uncertainty, so each investor needs to conduct thorough due diligence to formulate a balanced investment strategy.
