How Coinchange Mitigates Operational Risk

January 24, 2022
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When it comes to risks in the DeFi (decentralized finance) space, operational risks are those that should always be top of mind. Unfortunately, they’re not always easy to spot, but being aware and extra vigilant when spotting any potential red flags is a great starting point to helping keep your funds safe.

Operational Risks in DeFi

Unreliable or Anonymous Project Team

It’s always important to do your due diligence by carefully researching the team behind any project. After all, they’re the brains behind the operation and the ones who created the code and application itself, so a trustworthy team generally leads towards a well-built protocol.

Then there’s the case when team members choose to remain completely anonymous. This can sometimes be strange given that most project founders and team members elect to be front and center in the public eye.

While this anonymity has its respective benefits to the team members themselves, it poses a potential threat to the project’s investors and customers. Not knowing who’s behind the team eliminates large elements of credibility and requires a far greater amount of trust from investors.

How to mitigate risks in DeFi

Poor Management

Failure to manage the platform well or simply maintain upkeep can pose a great risk to user funds given that it’s not adapting to current trends, making it far more susceptible to infrastructural issues that could have negative long-term effects.

Continuous improvements must be implemented on a consistent basis in order to ensure the tech is up-to-date and adapting to current market needs.

Regulations

Many centralized platforms are experiencing tremendous pressure from regulators to be compliant according to certain standards and procedures. Regulators appear to be keeping a close eye on specifically targeting DeFi, and there are concerns that many of these protocols may not be adhering to these compliance measures. 

Moreover, increased regulations often drastically limit the potential features and offerings that DeFi protocols can provide. Failing to meet regulatory requirements can result in a potential shutdown or reduction of service offerings, potentially putting your funds at risk.


Economic Soundness

Together with poor management practices, a platform whose economic model relies on pyramidal marketing solely driven by FOMO (fear of missing out) from investors or hyperinflationary token rewards in the case of dApps (decentralized applications), should be avoided. These types of platforms usually aren’t able to provide value over longer timeframes, making investments risky and volatile in the short term as well. 

Making sure that the overall economic model and incentives are aligned with the platform's stakeholders is important to know before making an investment decision. 

Counterparty Used

Most DeFi and CeFi (centralized finance) platforms rely on third-party software or infrastructure to deliver their product and services. Such entities become an integral part of their business models and are outside of the project team’s direct control - they, therefore, become a point of failure that can jeopardize the security and viability of the platform's operations in the event of a shutdown or business closing.

Knowing the platform’s partners and third-party software vendors helps confirm their reputability, allowing you to better understand their underlying operational risk.

Coinchange Has the Answers

When using Coinchange, operational risk is mitigated through various parameters we’ve put in place. For one, you can find information about our team front and center on our website, so you know who’s a part of the organization and their respective backgrounds. 

Our custom-made DeFi strategies and algorithm are economically strong, managed by a reliable and confident team, and are backed by tremendous amounts of research and evaluation processes. In regards to regulations, Coinchange continues to work closely with regulators in the markets we serve to ensure full compliance and licenses are acquired so we can operate smoothly without concerns.

Reduce your operational risk and earn on your crypto with Coinchange today!


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