The decentralized finance (DeFi) space has been steadily growing, going form less than $500 million worth of cryptocurrencies locked a year ago to over $9 billion at press time.
Data shows that the space’s exponential growth took off after DeFi lending protocol Compound started distributing its COMP governance token. A yield farming trend was started with the COMP token launch, with users lending and borrowing from protocols that issued their own governance tokens in a bid to maximize yields with the token rewards.
Since then, new protocols helping users maximize their earnings across different protocols were launched as well. Currently, DeFi Pulse data shows four decentralized finance applications – Uniswap, Maker, Aave, and Curve Finance – have over $1 billion locked in them. A total of 30 dApps have over $1 million locked in them.
The Defi trend has gotten to the point where a new yield farming project saw users lock in over $500 million worth of cryptoassets on it before a bug was discovered. The project, Yam.Finance, made it clear its code was unaudited and that caution was strongly urged before engaging with its smart contracts. It reads:
While the initial creators of the Yam protocol have made reasonable efforts to attempt to ensure the security of the contracts, including forking much of the codebase from existing well-audited projects and soliciting review from friends, nothing approaching the rigor of a formal audit has been conducted at this time.
Things went wrong for the project, as a bug in the smart contract was affecting the rebasing contract. This meant the smart contract would mint more YAM than intended to sell on the YAM/yCRV pool on the decentralized exchange Uniswap, making it impossible for the community to reach quorum as far too many tokens were attributed to the reserve.
The price of the YAM token soon plunged, with Uniswap data showing that after hitting a $200 high it crashed down to $0.9 that same day. At press time, YAM tokens are worth a little over $0.01.
Users are throwing in rather large amounts of funds into the DeFi space in a bid to maximize their earnings, and while some are being very successful others are failing because of problems that are to be expected in such a nascent ecosystem. Various DeFi protocols have so far been exploited, mainly through the use of so-called flash loans.
A flash loan is a loan that, using DeFi lending services, is both taken and repaid in the same transaction. In a well-known case, an attacker used a 7,500 ETH flash loan to manipulate the price of a stablecoin and earn over $630,000 in the process.
Even projects that had their smart contracts audited by major firms have been exploited in the past. There are billions at stake in DeFi, and there could be huge payouts for hackers who put in the time to find ways to exploit smart contracts.
The solution for users trying to maximize their yields and sleep well at night could be crypto-insurance options.
Crypto-Specific Insurance Protects Users
Insurance has always been a way to mitigate risk and in the cryptocurrency space, several projects who got insured gained confidence from users. Decentralized finance projects aren’t just risky because of the lack of insurance, but also because they are based on smart contracts that could contain bugs in them.
A solution to this risk would be crypto-specific insurance options. One of these protections is offered by Nexus Mutual, which gives DeFi investors cover for smart contract bugs. Nexus Mutual is a mutual like any other, owned by its policyholders.
Its current applications are currently limited, as it does not protect users against natural disasters, but only covers smart contract failure. Its so-called “Smart Contract Cover” would have provided users an extra level of safety during the DAO hack In 2016.
Nexus Mutual’s payouts aren’t triggered by phishing attacks or network congestion issues, and are rather specific. As such, users should review the conditions of the coverage offered before purchasing it. Nevertheless, its coverage has already helped some recover lost funds.
The first successful DeFi insurance claim was with Nexus Mutual, as it agreed to honor two claims which totaled around $31,000. These claims were related to the bZx exploited mentioned above.
Members of the mutual have the final word on whether a payout should be triggered. Its members are NXM token holders, who must have to go through know-your-customer (KYC) and anti-money laundering (AML) checks to buy NXM.
Members are responsible for arbitrating governance proposals, as well as claims and risk assessments. Essentially when a claim is made, NXM holders can vote on whether the claim is legitimate or not.
The token can only be purchased through the Nexus Mutual platform, but there are ways to gain exposure to it. Even if you are not interested in the crypto-specific insurance, you may be interested in gaining exposure to the project’s token, which has already appreciated 300% year-to-date.
While NXM isn’t trading on centralized exchanges or even decentralized exchanges like Uniswap, it is possible to gain exposure to it and other DeFi-related tokens without having to deal with smart contracts.
Gain Exposure to DeFi Using Centralized Exchanges
Most top centralized exchanges have over the last few months been helping users gain access to the decentralized finance space, with most initially just listing Compound’s COMP governance token so users could trade the token that started the yield farming trend.
One exchange that has been standing out is OKEx as it has so far listed a total of 35 DeFi-related projects on its platform. The spot and derivatives exchange has been listing the tokens over time, and at one point added a total of eight DeFi tokens in a single day.
The number of listings is essentially allowing the exchange’s users to access the advantages of the decentralized finance space without having to worry about getting a Web 3 compatible wallet and trusting a smart contract.
Responding to the recent controversy surrounding SushiSwap, OKEx CEO Jay Hao revealed he believes the development of DeFi is a “big event to the entire crypto industry.”
OKEx has launched a “DeFi category” on its website which helps traders quickly find information on decentralized finance tokens. In previous announcements, the exchange has said its listings reinforce its commitment to the potential of the decentralized finance economy.
As reported, OKEx was the first centralized exchange to list Curve’s CRV token, and boosted the Dai Savings Rate’s rewards for its users if they deposited via its Earn program.
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