As decentralized finance (DeFi) revolutionizes the financial industry, understanding the specific financial risks associated with this emerging field is crucial. In this article, we will explore three concrete examples of financial risks: Oracle Manipulation, On-Chain Slippage, and Cascading Liquidations. Additionally, we will discuss how projects like Fibonacci and AvengerDAO collaborate to address these challenges and ensure the stability and security of the DeFi ecosystem.
Oracle Manipulation
Oracle manipulation is a significant financial risk in DeFi. Oracles provide external data to smart contracts, facilitating accurate information for decentralized applications. However, if an oracle is compromised, it can feed false data to smart contracts, leading to incorrect contract executions and substantial financial losses.
For example, Solend, a lending market on Solana, experienced a a $1.26M exploit when someone manipulated the oracle reporting the price of USDH, a Solana-native stablecoin. By manipulating the price of USDH from $1 to over $12, the exploiter borrowed far more collateral than they should have.
On-Chain Slippage
On-chain slippage refers to the disparity between expected and executed prices when conducting transactions on a blockchain. This risk arises due to low liquidity or sudden market volatility, impacting the profitability of trades in DeFi.
For instance, a trader recently lost a significant amount of capital when trying to exit their $PEPE position without adjusting their slippage.
Cascading Liquidations
Cascading liquidations pose a substantial risk in decentralized lending and borrowing platforms. When the value of collateral held in a loan falls below a predetermined threshold, it triggers an automatic liquidation to repay the lender. In volatile market conditions, a cascading effect can occur, where one liquidation prompts a series of subsequent liquidations.
For instance, in a decentralized lending protocol where multiple loans are secured with the same type of collateral, a sudden market downturn can cause the collateral's value to plummet. The first liquidation triggers a chain reaction as more liquidations occur, leading to a downward spiral and significant losses for borrowers and lenders alike.
Addressing the Risks: Fibonacci and AvengerDAO
To tackle these financial risks, projects like Fibonacci and AvengerDAO have emerged.
Fibonacci, an API-focused risk management platform, offers comprehensive tools to analyze and assess risks in DeFi. By leveraging on-chain data and integrating with various protocols, Fibonacci enables users to make informed decisions and minimize their exposure to financial risks. For example, Fibonacci provides real-time financial risk data on BNB-Chain DEXs, allowing users to adjust their strategies based on market conditions.
AvengerDAO, a decentralized autonomous organization, focuses on protecting all users of BNB Chain DeFi.
Conclusion
Understanding the specific financial risks in decentralized finance is crucial for participants in the rapidly growing DeFi ecosystem. Oracle manipulation, on-chain slippage, and cascading liquidations pose significant threats that must be addressed to safeguard investments and ensure the long-term stability of the sector.
If you feel confident in your understanding of DeFi financial risks, take our quiz for a chance to win a share of $1000 USDT!
Authored by Fibonacci Finance.