Lesson 11: Risk Management
🎯 Core Concept: Understanding DeFi Risks
Code is law in DeFi, but code can be flawed. Understanding and managing risks is essential for safely participating in DeFi.
📚 Types of Risks
Smart Contract Risk
Code can have bugs. Even audited contracts can have vulnerabilities.
Mitigation: Use well-audited, time-tested protocols. Start with small amounts.
Oracle Risk
Smart contracts rely on oracles for price data. If oracles are manipulated, protocols can be exploited.
Mitigation: Protocols using multiple oracles are safer than single-oracle protocols.
Governance Risk
Many protocols are governed by DAOs. If governance is compromised, protocols can be drained.
Mitigation: Understand governance structures. Be wary of highly centralized governance.
Liquidation Risk
In lending protocols, positions can be liquidated if collateral value drops.
Mitigation: Monitor health factors. Don't max out borrowing capacity.
Impermanent Loss
Liquidity providers face impermanent loss when token prices diverge.
Mitigation: Understand IL before providing liquidity. Consider stablecoin pairs.
Interactive DeFi Risk Assessment
Use this interactive tool to assess risks across different DeFi protocols:
🔑 Key Takeaways
- Multiple Risk Types: DeFi has many risk vectors beyond smart contract bugs
- Due Diligence: Always research protocols before using them
- Start Small: Test with small amounts first
- Diversify: Don't put all funds in one protocol
- Stay Informed: Follow protocol updates and security news
Next Lesson: In Lesson 12, we'll explore Layer 2s and the future of DeFi.