Because those businesses were running on centralized platforms, many have come to believe that that DeFi-based platforms, which didn’t face issues with liquidations, are safer. But Mosoff points out there have been several recent setbacks in the DeFi space including the failure of the algorithmic stablecoin UST, due to its flawed design, as well as hacks of various platforms and cases of smart contracts being exploited, leading to funds being stolen.
At the moment, he believes many new entrants in the DeFi space may not be fully accounting for the risks. Though he’s confident that the protocols will grow stronger over time, he acknowledges that today’s professional investors are probably unable to read the underlying code of a DeFi protocol, effectively making them a black box for anyone who’s not a programmer.
“DeFi isn’t perfect, and centralized finance is not perfect, either,” he says. “It’s important for professional investors and retail investors to understand the differences in the risk profiles that are taking on when they participate in these activities.”
While there’s no denying the fact that many of their customers were hurt or ruined, Mosoff says it remains unclear if the fallout is due to mismanaged treasuries or bad actors. He also reinforces why transparency and open protocols are an important part of spotting dangers in the ecosystem.
“We didn’t find out what really happened to 3AC, Celsius and Voyager until it was too late,” he said. “There’s a reason why DeFi platforms like Uniswap, Aave and Compound remained unscathed. DeFi lending protocols are over collateralized, and all transactions are publicity verifiable on-chain. If there’s a problem, many people in the community will be quick to point out the landmines.”
