The team at digital asset exchange Kraken notes that the rise of decentralized finance (DeFi) has brought a wave of innovation to the broader cryptocurrency and blockchain space, and it has also provided the opportunity for investors to generate substantial returns on their investments or deposits.
But in a manner that’s similar to all capital markets, particularly those that are still immature or nascent, DeFi’s reward does not come with its (significant) risks, Kraken notes in its latest report. They pointed out that “after all, depositing assets in Internet protocols is not the same as placing money on a trusted exchange or a bank.”
With this in mind, the researchers at Kraken Intelligence have released their second report which is part of their “Crypto Yields” series. As noted by the digital assets firm, their research team has closely examined the makeup or composition of DeFi lending in order to assist market participants with navigating this emerging sector.
The report aims to provide a digestible yet fairly thorough assessment of the related counterparty risks, the expected or projected returns, the overall DeFi market liquidity, and the different ways these protocols can help investors earn sizable returns on their assets.
According to Kraken Intelligence, one of the “most vulnerable” attack vectors is price manipulation – which is an area the report looks into quite closely. In order to promote transparency and security with these DeFi platforms, Kraken has released the Oracle, a utility that verifies data used to price the smart contracts powering these protocols.
As noted in the report, DeFi has “opened up access to financial services for both banked and unbanked individuals globally through the use of the Internet.” It also mentioned that with new participants joining in and incumbents failing to provide competitive rates, consumers are increasingly looking for better opportunities that provide substantial returns and allow for participation in innovative financial products that “cross geographical boundaries.”
The Kraken Intelligence team added:
“We hope to educate market participants in the DeFi space while also encouraging individuals to be more security-aware and risk cognizant. The world of cryptocurrencies is still vastly different from traditional systems and its offerings, but once we understand the risks associated with these new platforms and applications, we believe that we can make informed decisions and manage the risks that affect the yield of DeFi investments.”
The report further noted:
“Between the inherent complexities of DeFi and the value Kraken places on security, we hope that a better understanding of DeFi and its risks will improve overall security standards across this industry as market participants make informed decisions and demand greater platform security.”
(Note: You may access the full report here.)
As the DeFi space continues to grow and evolve, the Global Digital Finance team has also shared some predictions from industry participants.
As noted by Global Digital Finance, the institutional investment in digital assets should continue to increase, according to industry experts. DeFi is also well on track to grow and acquire a lot more attention from regulatory authorities across the globe, industry analysts have confirmed.
In addition to DeFi, other blockchain or DLT-focused initiatives such as central bank digital currencies (CBDCs) are expected to launch in the foreseeable future, industry insiders noted. We can also expect greater crypto-banking “convergence” and should also see the value of the digital assets market grow considerably, having recently surpassed the $1 trillion mark.
The Global Digital Finance team also pointed out that industry leaders believe that the Facebook-led Diem (previous Libra) project will eventually launch. The industry should also be prepared for “greater emphasis on tax treatments,” the acceleration of traditional asset tokenization, an overall “positive impact” of the Biden Administration, and self-hosted crypto wallets could face “greater scrutiny,” the team at Global Digital Finance added.