This article was kindly contributed by Guest Author, Jonathan Wai.

In this series of articles, we take a deep dive into the world of DeFi and explore yield farming strategies.

Yield farming” involves doing more than just holding the asset alone. The simplest and most popular methods are lending, staking, and providing liquidity. Lending of crypto assets is the most straightforward of the three, and will be the focus of this article.

Risks of Crypto-Lending

Given that the model of crypto-lending is largely similar to that in traditional finance, its risks are relatively straightforward to analyse.

Credit risk

Investors should start by assessing the risk of the crypto-lending service used as well as the borrower’s credit risk.

With most crypto-loans being heavily over-collateralised, credit risk is significantly mitigated but the tail risk of a flash crash remains, which would result in a significant loss of value of the posted collateral