Crypto glossary
DeFi risks
DeFi risks are the ways funds can be lost in decentralised finance: contract bugs, oracle failures, depegs, bad governance, thin liquidity and admin keys.
Using a DeFi protocol means trusting code and the assumptions behind it. Smart-contract risk covers bugs and exploits; oracle risk covers wrong or manipulated prices; economic risk includes liquidation cascades, bad debt and depegs of stablecoins or staking tokens; and governance risk covers admin keys, malicious proposals and upgrades that change the rules. Bridges, wrapped assets and the chain itself add more layers.
These risks compound because protocols are built on top of each other: a vault may deposit a staking token into a lending market that relies on an oracle and a bridge, so a failure anywhere can spread. Rating services, audits, bug bounties, insurance and dashboards that track admin permissions and TVL concentration try to make the risks visible.
Audits reduce risk but do not remove it, and many large hacks hit audited code. High yields usually reflect higher risk or token emissions rather than free money. A practical check is to ask where the yield comes from, who can change the contracts, how the price feeds work and how fast you could exit.
Example
Before depositing in a new vault, a user checks its audits, its timelock, which oracle it uses and whether its collateral includes a bridged token, then decides to cap her exposure at 5% of her portfolio.