DeFi is a new line of business and by DeFinition a new risk sector with particular risks differing from the traditional financial sector and covering intangible risks. It will require modelling and correlation like other sectors but will have the advantage of real time granular data reducing the dependency of assumptions made in risk modelling. The following diagram shows the risk landscape as we perceive it traditionally pre DeFi evolution. This is a centralized model where intermediaries and third parties perform risk analysis to match the assets with liabilities. Much of DeFi has...

Synthetic assets, sometimes referred to as synths, are a combination of cryptocurrencies and traditional derivative assets. In other words, synths are tokenized derivatives. Synthetic assets are essentially tokenized derivatives. In the traditional financial world, derivatives are representations of stocks or bonds that a trader does not own but wants to buy or sell. In essence, if you want to profit from the price fluctuations of a stock that you don’t own, you can do this through a derivative. Synthetic assets, or tokenized derivatives, take this process one step further by adding...

Liquidity pools enable users to buy and sell crypto on decentralized exchanges and other DeFi platforms without the need for centralized market makers. A liquidity pool is a crowdsourced pool of cryptocurrencies or tokens locked in a smart contract that is used to facilitate trades between the assets on a decentralized exchange (DEX). Instead of traditional markets of buyers and sellers, many decentralized finance (DeFi) platforms use automated market makers (AMMs), which allow digital assets to be traded in an automatic and permissionless manner through the use of liquidity pools. The...

Lending and borrowing, within the realm of traditional as well as crypto finance, entails the act of one party providing monetary assets — be it fiat or digital currencies — to someone else in exchange for a steady income stream. The concept of “lending and borrowing” has been around for ages and is one of the core aspects of any financial system, especially the “fractional banking” setup that is predominantly used across the globe today. The idea is extremely straightforward — i.e., lenders provide funds to borrowers in return for a regular interest rate, and that’s quite literally it....