Lesson 7 — DeFi Risks

DeFi can be powerful, but it introduces risks that many users underestimate. Unlike traditional finance, DeFi often requires users to interact directly with smart contracts. This gives users control, but it also makes them responsible for wallet safety, approvals, transaction review, and protocol selection.

This lesson focuses on the major risk categories in DeFi. Smart contract risk occurs when code has bugs or vulnerabilities. Liquidity risk appears when there is not enough depth to enter or exit efficiently. Impermanent loss affects liquidity providers when asset prices change relative to each other. Oracle risk occurs when a protocol depends on external price data that can be manipulated or fail.

Bridge risk is another major category. Bridges connect networks, but they can become high-value targets. Governance risk can appear when protocol decisions are controlled by token voting, multisigs, or centralized teams. Phishing and malicious approvals can also drain user wallets.

Students learn that high yield often signals high risk. A protocol offering unusually high returns may be compensating users for real danger, unsustainable incentives, or hidden exposure.

The purpose of this lesson is to build a risk-first DeFi mindset. Before using any protocol, students should ask: where does the yield come from, what can fail, who controls the system, and what happens in stress?

1. Research one DeFi exploit and summarize what failed.
2. Write a wallet approval safety checklist.
3. Explain impermanent loss in simple language.
4. Pick one DeFi yield opportunity and list possible hidden risks.