<p>With the numerous benefits it brings, DeFi seems like a great tool for managing finances. However, after the Celsius’ crisis, the world recognized that DeFi also has many problems which have significant effects on "user’s wallet." Ultimately, what are these problems? How are they affecting the blockchain market as well as the financial world? Let's find out with <a href="https://www.builder.news/" alt="" title="Builder.news" target="_blank" rel="" class="">Builder.news.</a></p><h2>Recent problems in market and its consequences</h2><p>Recently, the market seems to have been almost knocked down when facing the Celsius crisis. However, thanks to this accident, investors realize the lack of the DeFi platform, which is always believed to be a great tool in the management of finance. The next paragraphs, we will give three big vulnerabilities which are abstracted from the Celsius crash. </p><h3>Manage without the intermediaries</h3><p class="prosemirror-p-center"><img src="https://cdn.builder.news/news/11ecf90bf6e68209a8e6023f659fee92.jpg" alt="" title="DeFi problems" width="600" height="400" class="lykafe0"></p><p class="prosemirror-p-center"><em>Source: Trulico</em></p><p>One of the key features of DeFi is to manage finance without the involvement of centralized intermediaries. It operates based on automating protocols on blockchain and stablecoins to conduct payment transfers. The appearance of third parties such as banks plays an important role in preventing the investment from going under. This connection would increase the potential for spillovers, which would result from links between banks' asset and liability sides, as well as non-bank entities' operations that bridge the two systems.</p><p>So far, banks are restricted from participating in the crypto ecosystem by a conservative regulatory framework. Therefore, in a risky case such as the Celsius crisis, there are no intermediaries involved in the process of loans. Hence, when Celsius crashes, investors will lose everything.</p><p>Obviously, managing finance without the involvement of intermediaries may effectively work during bull markets when firms get net inflows and expand their client base.</p><h3>The leverage in transactions</h3><p class="prosemirror-p-center"><img src="https://cdn.builder.news/news/11ecf90bf6e6880ba8e6023f659fee92.jpg" alt="" title="leverage in transactions" width="600" height="363" class="lykafe1"></p><p>DeFi is distinguished by the significant leverage available through loan and trading platforms. While loans are often overcollateralized, funds obtained in one transaction can be used as collateral in another, allowing investors to develop increasingly significant exposure for a given amount of collateral.</p><p>Leverage allows for the purchase of additional assets for a given amount of money. However, when debt must be decreased, for example, due to investment losses or depreciating collateral, investors are obliged to sell assets, placing further downward pressure on prices. Such procyclicality can be exacerbated by the trading behavior typical of early-stage markets, such as the outsized role of momentum trading, which can contribute to price fluctuations. Furthermore, because the system's stability is dependent on the weakest links, the built-in interconnection among DeFi apps might aggravate suffering.</p><p>In the Celsius case, the company used the users’ deposit to invest and promised to bring back a huge amount of money for them. But, these investments are not transparent as well as not having detailed plans for the community. Hence, investors don’t know its potential before sending their saved money to them. </p><p>Therefore, investors can recognize that when cryptocurrency prices decline, the crypto companies that do not provide lending services, as well as not use the users’ deposits to invest, will avoid a huge risk.</p><h3>Low liquidity and run-risk in stablecoins</h3><p class="prosemirror-p-center"><img src="https://cdn.builder.news/news/11ecf90bf6e68bfda8e6023f659fee92.jpg" alt="" title="Low liquidity and run-risk in stablecoins" width="600" height="278" class="lykafe2"><br> </p><p>The precise nature of stablecoin vulnerabilities is determined by their design. Liquidity mismatches exist in coins backed by short-term securities with illiquid secondary markets, such as commercial paper. Those backed by fluctuating collateral, such as crypto assets, are vulnerable to market risk since their value can swiftly fall below the face value of stablecoins. Although overcollateralization normally mitigates such risks, it can be depleted as volatility rises.</p><p>Investor runs are more likely when liquidity mismatches and market risk are present. The success of stablecoins is dependent on investors' faith in the underlying assets' worth. Transparency and a lack of regulation may rapidly destroy confidence. If investors have reservations about the quality of the assets, they have an incentive to be among the first to sell stablecoins or convert them to fiat cash. As a result, a first-mover advantage might spark off runs, resulting in fire sales of assets. Furthermore, a loss of faith in stablecoins might have far-reaching consequences for DeFi. Transferring cash between investors and platforms would become more expensive and time-consuming, undermining the "networked liquidity" that is a major aspect of DeFi.</p><p>According to Josef Ttek, Bitcoin (BTC) analyst at the crypto cold wallet startup Trezor, "every player must respect the risks involved, since there are no bailouts in the market, thus if a borrower fails to repay, a lender must accept their loss. There is no risk-free income, and the yield is frequently insufficient to compensate for the dangers."</p><h2>Conclusion</h2><p>History has shown that the early development of revolutionary technologies frequently results in bubbles and a loss of market integrity, even when it produces discoveries that may be of greater utility later on. DeFi might still play a key role in the financial system with advancements to blockchain scalability, large-scale tokenization of traditional assets, and, most critically, appropriate regulation to maintain protections and boost confidence.</p><div class="pr-block-special"><strong>Disclaimer:</strong><br>This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.</div>

After Celsius's crisis, the world recognized that DeFi holds many big vulnerabilities. What are they? Let's find out in this article!

DeFi problems exposed after market's dump