Decentralized finance is becoming more and more present in the reality of people and companies. Adapting to new times and new financial technologies has many opportunities, as well as risks. In this article, we will explain them and see how risk managers can prepare for them.
What is decentralized finance?
Decentralized finance, also known by DeFi or Decentralized Finances, are monetary applications or systems that do not need any intermediaries to function. Transactions are approved using blockchain technology and is therefore fully decentralized.
One of its main features is that they do not need to be controlled by banks, nor unnecessary paperwork. Everything works through technological devices such as smartphones, tablets, or computers.
Risks of decentralized finance
The main risks of decentralized finance are several. Below, we will detail the most important ones:
- DeFi have a very high volatility risk, with large price fluctuations both up and down in a short time.
- People’s lack of knowledge: seeing the growth of many cryptocurrencies, people invest without knowing how DeFi works, assuming great monetary risks.
- Competition from new digital currencies. Faced with the birth of new types of decentralized currencies, there are governments that are creating their own digital currencies to face them. They will not be in physical format, on paper or metal, but still controlled by the administration.
- Decentralizing is not easy. Although the main goal is total decentralization, there is always the risk that they will start to be regulated by another new type of even more centralized administration.
- DeFi scams are also a major risk and have resulted in millions of dollars in losses for many people. Pyramid schemes disguised as decentralized finance, platform security problems or copying Smart Contracts are some of the scams that can occur if you are not vigilant.
- The opposition of governments and entities that control the current finances, which will seek ways to combat DeFi.
Opportunities and advantages of DeFi
On the other hand, DeFi has many advantages and opportunities that can be taken advantage of in today’s economy.
- Security is excellent and, in many instances, is better than the security of traditional finance processes.
- Immutable traceability using Blockchain technology. When a record enters the blockchain, it can be monitored in real time and completely securely.
- The elimination of bureaucracy, paperwork, and lengthy procedures for banking.
- Very complex processes can be automated, for example, with Smart Contracts.
- Technology is progressing and there are more and more possibilities for decentralized finance, taking advantage of new digital systems and new devices.
- The amounts of cryptocurrencies that have already been mined are public. This information is available to everyone, as well as how they are distributed.
New challenges in the risk management of decentralized finance
Decentralized finance brings new risk management challenges for organizations. First, savings will become more diversified and, therefore, savers will demand information and security. Another new challenge will be to manage the FOMO (Fear of Missing Out) of investors and shareholders.
Training to manage risks in decentralized finance
Risk managers have a new challenge in front of them: decentralized finance and cryptocurrencies. For this, it is necessary to acquire the precise skills and knowledge and to be able to manage these risks with total efficiency.
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