If you’ve made is this far you’re probably wondering about the risks of DeFi products. We’ll need to use some technical terms to explain, so we recommended checking out how we use digital assets for background information.
While they have certain risks.. digital assets have enabled independence from an outdated financial system. Everyday people are embracing the change with financial products of different risk profiles to traditional bank accounts.
With that in mind – here is a product overview and risk breakdown (including mitigation strategy).
tiiik utilises principal-protected stablecoin savings products.
Essentially these are apps enabling users from all over the world to lend and borrow from one another.
Here’s an example:
1 – Borrower provides $100 of digital assets as security
2 – Automated smart contract enables borrower to loan $50
3 – Borrower repays the loan at the agreed interest rate
4 – Interest generated paid in real-time to the lender
Funds are protected by over-collateralisation ($100 security, $50 loan).
Importantly tiiik only provides liquidity to the lending side of these products.
DeFi products are managed by third party providers. This means your funds are held by someone other than tiiik while earning interest.
As part of this, there could be security flaws in the code whereby funds may be irrevocably lost.
To manage this risk we only use well established and ethical custodial solution providers.
To secure the P2P transactions within DeFi products, borrowers provide digital assets as collateral which can be liquidated rapidly if extreme market movements occur.
Risk mitigation is through a dynamic interest rate model:
– when capital is available: low interest rates to encourage loans
– when capital is scarce: high interest rates to encourage repayments of loans and additional deposits
Interest is generated within DeFi products by lending to borrowers. If there was a wave of payment defaults on the borrower side the liquidated collateral may be unable to cover lender funds.
Risk is mitigated via algorithmically determined borrowing capacity; liquidating borrower collateral once a certain ratio is exceeded.
The transition to a new financial model of economical alignment and sustainability is just beginning.