Defining Economic Risks

Economic & Financial Risks

Economics and Financials risks are tied to the economic mechanisms and financial management of a DeFi protocol. Some examples:

  • Unsustainable reward/yield generation leading to depleted treasuries

  • Poor parametrization and monetary policy decisions

  • Lack of adequate reserves to cover losses or stabilize collateral

  • Infeasible assumptions about user behaviors within mechanisms

  • Intrinsic Asset Risk: UST, Cream, USDC ?

Tokenomics Risks

Tokenomics Risks are specifically associated with the token model and incentive structure design of a DeFi protocol. This includes riskss such as:

  • Impermanent loss disincentivizing liquidity providers

  • Inadequate token incentives leading to loss of users

  • Token distribution allowing misuse of governance powers

  • Volatile token prices impacting protocol sustainability

Supply-side: impermanent losses

Demand-side: liquidation, bad debt

The difference between Economic Risk and Tokenomics Risks

Tokenomics risks and economic/financial risks are related but distinct categories of risks for DeFi protocols. Tokenomics risks focus specifically on the protocol's native token model, while economic/financial risks encompass wider risks from parameters, yields, and flawed assumptions. But these two realms often influence each other.

Impermanent loss

MEV Risk

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