What are the security risks of DeFi lending platforms?

There are three main security risks of DeFi lending platforms:

Rug Pulls

This is an exit scam where project owners issue a new coin, pair it to major crypto like ETH and create a liquidity pool. They market their offering and promise investors high yields. When the staked amount reaches their target, the owners use back doors to issue more coins and dump them for the staked coins.

Impermanent Loss

When you lock your tokens in a DeFi protocol, you risk impermanent loss. Basically, this is when the value of your locked tokens changes, creating an unrealized loss versus if you had them in your wallet for exchange. The best strategy for preventing impermanent losses is offering liquidity to pools with less volatile tokens like stablecoins.

Flash Loan Attacks

These are unsecured loans that leverage smart contracts to mitigate traditional banking risks. Flash loan attacks happen when selfish individuals borrow massive amounts and use them to manipulate the market or take advantage of unstable DeFi protocols.