The birth of the DeFi world occurred in 2017, a few months after the full launch of the Ethereum platform. Since then, DeFi has been growing at an accelerating rate, with new projects launching every month. 

But, starting a DeFi project requires a lot of research and development expertise. The founders need to research the DeFi space and how to launch successful projects. However, after serious research, founders should still be very careful when considering creating a crypto startup. But why should crypto startups be cautious of DeFi? Here are the five reasons.
<h2>Blockchain Risks</h2>
DeFi largely depends on how the host blockchain infrastructure operates. If the host blockchain has some <a href="https://www.cryptoknowmics.com/news/cryptocurrencies-the-future-of-finance">problems</a>, all the DeFi projects will face a similar problem.

For instance, DeFi projects suffered from Ethereum's low scale and high gas fees. Moreover, there are other compromising factors in blockchains. 

Blockchains using proof of stake mechanism could fall into the issue of validator cartels. A <a href="https://www.coindesk.com/markets/2019/02/24/validators-create-new-attack-vectors-for-decentralized-systems/">validator cartel</a> is when multiple network validators conspire to control reward distributions in a blockchain. They end up affecting all DeFi protocols operating under the blockchain. Hence, when starting up crypto projects, founders must be careful with the choice of Dapp host blockchain.  
<h2>DeFi is Prone to Attacks </h2>
Another reason for startups to be careful when dealing with DeFi is the attacks. The DeFi space is prone to different types of attacks that could temporarily or even permanently affect the functioning of the Dapp. 

Some exogenous factors could also affect the performance of the DeFi protocol. For instance, in a DeFi lending application, the Dapp could face flash loan attacks. A <a href="https://coinmarketcap.com/alexandria/article/what-are-flash-loan-attacks">flash loan attack</a> occurs when an investor borrows massive amounts with the intention of market manipulation. The recent <a href="https://www.coindesk.com/business/2021/10/27/cream-finance-exploited-in-flash-loan-attack-worth-over-100m/">Cream Finance</a> attack is a perfect example of a flash attack.

In other applications, startups could face oracle manipulations, <a href="https://www.coursera.org/lecture/decentralized-finance-opportunities-and-risk-duke/governance-attack-usZSG">governance attacks</a>, and market manipulations. A governance attack occurs when a small part of the leadership makes decisions that impact the entire project. To avoid such situations, startups must consider different types of governance models. 

There are various forms of attacks that could affect DeFi startups. Founders should learn about the attacks and institute measures to avoid them.
<h2>Smart Contract Risks</h2>
<a href="https://coinmarketcap.com/alexandria/article/what-is-smart-contract-risk">Smarts contracts risks</a> are another major problem in the DeFi space. Creating smart contracts involves coding and executing everything on a blockchain. A developer has hundreds if not thousands of lines of code. If not done correctly, there is always a risk of creating bugs or malfunctions in applications.

Poor coding may create apps that risk investors' funds. For example, it could lead to problems with the project's taxation system. It could also result in bugs that slow down or interfere with the entire smart contract.

Wrong coding could also impact oracle networks. <a href="https://chain.link/education/blockchain-oracles">Oracle networks</a> are systems that feed external data to the DeFi projects. If a DeFi project has bugs that hinder connection to oracles, it will not receive updated data. 

Since developers create smart contracts, some may intentionally leave bugs to exploit investors. That could include cases of honeypot attacks. Therefore, DeFi startup founders should know that bugs exist in the crypto space and plan to deal with them. 
<h2>Market-Related Risks in DeFi</h2>
Another type of attack associated with the DeFi space could be a market attack. There are different types of market attacks. One is market manipulation. 

Market manipulation is when investors use different strategies to force asset prices up or down. An investor or a group of investors deceives others leading to changes in the prices of tokens. 

The case of market <a href="https://www.cryptoknowmics.com/news/how-do-crypto-wallet-work">manipulation</a> has been quite prevalent in the DeFi market. While whales may cause some, others could be caused by project founders or teams.

Assets like stable coins also have problems, especially if the backing assets have issues. Moreover, there could be cases of asset price crashing leading to the mass removal of funds for LPs. The point here is various matters may contribute to market manipulations causing risks to DeFi assets.

Different DeFi projects have instituted different ways of dealing with the <a href="https://hackernoon.com/hedging-against-market-manipulation-with-defi-mg2q33q1">market manipulation </a>issue. Some have controlled the number of tokens a wallet should have. There are controlled systems that ensure tokens are constantly converted to other tokens. 
<h2>Tough Regulatory Environment</h2>
Finally, before joining the DeFi space, the regulatory environment is a factor to watch out for. Since its launch, the crypto world has faced many regulatory issues. Various watchdogs from the USA, UK, South Africa, China, and other countries have instituted policies to regulate crypto. 

One problem is, in most countries, the regulation of DeFi is different from that of crypto. Moreover, other countries have different treatments of DeFi tokens. Furthermore, some governments could set requirements for any crypto networks, including DeFi projects. 

The regulatory environment is also changing. The SEC, FCA, and other watchdogs are yet to set a proper system for regulating DeFi. This ever-changing DeFi regulatory environment is something startup founders should consider. 
<h2>Final Take</h2>
This guide has explored why upcoming cryptos startups should be cautious of DeFi. The new nature is one reason to be very careful when dealing with DeFi. However, there are other reasons, including smart contract risks, blockchain risks, market risks, regulatory risks, and attacks. 

The risks discussed above can cause severe problems for DeFi startups. If a startup faces one of those issues at very early stages, it could completely die. Hence, founders need to be aware and cautious of those issues.

5 Reasons Why Upcoming Cryptocurrency Startups Should be Cautious of DeFi

The birth of the DeFi world occurred in 2017, a few months after the full launch of the Ethereum platform

Adam is an outgoing young lad who likes adventures and discovering new things.Despite his boring life, he loves writing about cryptocurrencies and exploring what blockchain technology can do for the coming digital world where all adventures will be virtual.

5 Reasons Why Upcoming Cryptocurrency Startups Should be Cautious of DeFi

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