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Risk in DeFi (3/3): Evaluating technical risk in DeFi solutions

Risk in DeFi (3/3): Evaluating technical risk in DeFi solutions

Welcome to the third installment in our series on “Risk in DeFi!” This article will explore the technical risks associated with using decentralized financial (DeFi) solutions.

In Part 1 of our series, we looked at procedural risk and highlighted some of the ways hackers might manipulate users into compromising their security and best practices for avoiding such issues.

Part 2 of our series explored financial risk and how to assess the potential risks and rewards associated with investment opportunities in DeFi and how to compare them with the opportunities available in the world of traditional finance.

Technical risk refers to problems in the hardware, software, and protocols that inform a product or service and pose an actual threat.

Read on to learn more about the major technical risks that can compromise new technologies and the common risks associated with hardware, software, and smart contracts.

Risk in DeFi

Before we talk about technical risk, here’s a quick refresher on the other forms of risk to consider when dealing with DeFi solutions.

In addition to technical risks, the other forms of risk to consider are financial and procedural risk.

Financial risk involves comparing the potential risk and reward associated with various investment opportunities with the goal of constructing a successful portfolio in accordance with a person or organization’s tolerance for risk.

Procedural risk examines the ways in which users might be manipulated into using the product in unintended ways that could compromise their security.

Technical Risk

When examining DeFi solutions for technical vulnerabilities we have to consider the “normal” software, the smart contracts deployed to the blockchain or distributed ledger, and the hardware used to interface with all of that software.

It’s important to distinguish risks from vulnerabi...

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