DeFi is Too Risky Now as It Behaves Similar to CDOs

Decentralized Finance (DeFi) has gained a high reputation in the crypto space in recent months, and prices of DeFi coins have recorded high performance. Rush in the DeFi space has also raised some concerns as it may pose some threats to crypto-economy.

Decentralized finance endeavors to launch products that are not governed by a central authority but are fully decentralized. However, decentralized finance can result in a worst case scenario as everyone is jumping in without even understanding it.

Collateralized Debt Obligations

Some people have compared DeFi with CDOs, which are collateralized debt obligations. CDOs were distributed by banks to investors and these were tied to the American housing market. The housing market went down and the whole system based on it collapsed. According to reports, the European and the US banks lost more than $1 trillion from January 2007 to September 2009. At that time, investors also rushed towards CDOs but then got disappointed with them.

“This situation has a lot of similarities to the issues with collateralized debt obligations which were the cause of the 2007 financial crisis (complexity which hides risk),” Richard Red, Research and Strategy lead at Decred, stated while talking to a news media outlet.

Under the umbrella of DeFi, different companies such as insurers, borrowers, or lenders, are rushed in. Red explained:

“At an aggregate level, the degree to which DeFi users string different protocols and smart contracts together must also result in some systemic risk, as each smart contract relies on the inputs from other smart contracts to behave in a predictable way.”

Complexity in DeFi Space

The complexity created by the interaction of different protocols is a risky thing, which is also difficult to explain. “The complexity that results from the interactions of all these novel protocols means that it can be very difficult even for experts to know exactly what is happening, and unexpected things which are difficult to explain happen quite regularly,” Red concluded.

Some experts are comparing DeFi with ICOs from 2017-18. ICO bubble disappeared after financial regulators had designed strict policies over the issuance and distribution of coins.

Leave a Reply

Your email address will not be published.

Related

Britain’s Chancellor Defers Tough Decisions to The Next Administration

The new British government is characterized by its severance to caution when it comes to its economic administration and its readiness to devote itself to performing just causes, regardless of the financial toll on the political sector.  As its precursor, Liz Truss, in September, decided to divide Britain’s economic organization, and the event exposed enormous […]

Genesis Halts Withdrawals Amid a Collapse of The Digital Currency Market

Genesis Global Capital has stopped processing withdrawals, confirming this week’s rumors. This is the most current lending program to file for bankruptcy. In 2022, Celsius Network, Voyager Digital, and other companies did so. At the moment, Derar Islim is Genesis’ acting CEO. Islim told Investors that the firm is looking at its options and seeking […]

Nayib Bukele Pledges To Buy 1 BTC Daily for El Salvador

The President of Els Salvador has pledged to start buying at least 1 BTC daily. This news emerged months after El Salvador is said to have completed its final BTC acquisition, 80 BTC at quite a cost of $19k each, in July this year. Previous Buy History of El Salvador  As per information from Buy BTC […]

Indonesia’s Central Bank Raises Rates By 50 Bps

In light of a robust economy and “high” inflation expectations, the Bank of Indonesia said on Thursday that it would act more firmly. As a result, the bank has increased the benchmark interest rate for the third consecutive month. A Global Economic Slowdown Bank of Indonesia was expected to increase the 7-day reverse repo rate […]

G20 Countries Commit to Uniting Their Efforts Towards a Robust Global Economic Recovery

Several countries in the G20 organization, the U.S, India, and the EU, have promised to create a robust global economic recovery by providing more employment and encouraging development. The proclamation made by the G20 Bali governors comes after the summit, which discussed solutions to the dilapidating economy, attended by some of the top global rulers. […]