Wave Financial Executive Warns of Risks in DeFi Loans

Ryan Anderson, Head of Trading at Wave Financial Group, analyzed loans, guarantees, cryptocurrencies, and DeFi.  

Anderson explained that often investment opportunities are offered. Additionally, they have predecessors in traditional markets that are not so well known. 

Borrowers can borrow cryptocurrencies, such as BTC, with another type of cryptocurrency as collateral. In the traditional world, operations like this are probably best compared to a form of securities lending. This is because people who own BTC and other desirable cryptocurrencies can get an additional return for lending their assets to the counterparties that need the loan. In general, this operation facilitates short sales. But one can use loans in the same way to finance a futures operation.

In stocks, the short interest, or percentage of outstanding shares borrowed in securities lending, is often a signal of the market trend for a particular stock. The list of stocks with the highest short interest on the New York Stock Exchange (NYSE) is a series of underperforming companies, he added.

DeFi: Is it the start of a new era in finance?

There is no similar metric for cryptocurrencies, probably since most altcoins are not worth much relative to BTC. However, examining similar figures in the future may help for valuation.

When it comes to crypto-backed crypto lending, the biggest story can be found in the world of decentralized finance, Defi. 

DeFi is a general term for the industry’s booming sector’s activities. They harness smart contracts’ power to automatically settle complicated financial transactions. As a side note, this topic can get quite tricky. It deals mainly with essential distributed computing, and even people like Vitalik Buterin struggle to communicate what is happening exactly.

Ethereum founders developed an application development with a programming language called a smart contract.

Unlike Bitcoin, Ethereum is more useful this way. When its founders developed a cryptocurrency, they also created a way for people to communicate and interact with cryptocurrency-based functions. Good uses for smart contracts would include applications such as escrow in real estate transactions. One can program smart contracts to accept funds from a buyer, hold them, and deliver them to a seller automatically after fulfilling certain conditions specified during the creation of the application.

The risks of DeFi loans at any level are quite high, and the returns are uncertain. More specifically, yield farming risks increase with the leverage allowed by smart contract implementations and returns become even more uncertain due to their dependence on the volatile price of tokenized rewards. Investors interested in committing their capital or their clients’ capital in these efforts should drastically limit the number of funds allocated to them.