3rd Party Risk

The risks in cryptocurrency aren’t transparent.

Introduction:

I read an article by @taskmaster4450 about 3rd party risk, as the most important risk in cryptocurrency investments. And I must agree.

First a definition
Third-Party Risk – the potential risk that. arises from financial institutions relying on outside parties to perform services or activities on their behalf.
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Discussion

As I look across the DeFi landscape and I reflect on why so many investors suffered losses in Terra Luna, BlockFi, 3Arrows Capitol and FTX it was third party risk. Investors sent their Bitcoin to these places to be invested, but once the Bitcoin left their wallets they were trusting these companies to safeguard it, and send it back upon request. Little did they know that their Bitcoin was sent to another or 3rd party. And when that 3rd party did unwise investments with their funds, the investors lost all their Bitcoin. It’s been over a year, and most of those investors are still waiting.

Contrast those investments with true DeCentralized Finamce like Unaswap, PanCakeSwap or Cubfinance. Your crypto is deposited in the liquidity pools, you can check your balances everyday and withdrawal it anytime because even in the liquidity pools you control it.

This is the difference between Centralized Investment systems with 3rd party risks and Decentralized investment systems without 3rd party risk.

While they both have market volatility risk, hack risk and rug pull risk, only one has 3rd party risk. And if we have learned anything from the last 2 years, 3rd party risk is very important.

Conclusion:

Third party risk was behind the biggest disasters in cryptocurrency history.
If we don’t learn from this history, we are doomed to repeat them. I hope cryptocurrency investors wake up and start recognizing this risk, and move their money to safer investments. Only then will companies featuring 3rd party risk investments close them, and offer investments without that risk.

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