DeFi is risky. It is important that you understand the risks at varying levels. This section describes the risks associated with this strategy. Some risk are more concerning than others
Blockchain Protocol Risk Important
Risk All the risk associated with Ethereum as a blockchain applies here. Please make sure you understand these.
How to reduce: Ethereum has been around since 2014. It has been battle tested. It is open sourced with a huge developer community working on all levels of the protocol. It is permissionless, decentralized and secure. It is undergoing upgrade to make it scalable.
Important Note: All other blockchains achieve scalability and thus less expensive by sacrificing decentralization, permissionless, or security.
These are important to the ethos of a blockchain. And I would argue, defeats the purpose of the blockchain if any of these are sacrificed. This is why we have chosen Ethereum.
DeFi Protocol Risk Important
Risk While smart contracts are audited, these don't eliminate risks completely. Don’t supply your life savings, or assets you can’t afford to lose.
How to reduce: Uniswap has been around since 2018. Their smart contracts are fully audited. Their code is open sourced.
Important Note: Other smart contracts that provide aLiquidity Pool (LP) token or uses leverage through borrowing/lending, increases your risk by introducing complexity. And while financial instruments are more exciting and may be more lucrative, it is not worth the risk; especially at this early stage of DeFi. This is why we have chosen a relatively simple DeFi method of providing liquidity using Uniswap
Leverage is a dangerous game to play!This strategy doesn’t use leverage or allow your position to be leveraged. It even tries to isolate from DeFi protocols that does use leverage.
Impermanent Loss (IL) Minor
There is no escaping IL in any strategy where you provide liquidity.
However, IL is real but not as important. Use this
The idea is to offset any IL with the fees you collect.
Note: What is really important is to monitor your Token. If it decreases significantly or crashes, this has the potentials to wipe out your capital. HOWEVER, keeping your position within the range will earn you fees while you HODL. If your token crashes you have other worries than impermanent loss.
Peg Loss Minor
Risk If one of the stablecoins in the pool goes significantly down below the peg of 1.0 and never returns to the peg, it'll effectively mean that pool liquidity providers hold almost all their liquidity in that currency.
How to Reduce: This strategy uses USDC which is fully audited and backed by USD. Circle/Coinbase are the issuers of this token.
Staking Risk Minor
Risk: When staking you use multiple smart contract products each of which has its own risks.
How to Reduce: By limiting the number of attack vectors (in this strategy to Ethereum and Uniswap), you can reduce the number of smart contracts you are interacting with.