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DeFi remains a high-risk sector due to its reliance on immutable code and complex financial mechanisms.

• Risk: Smart Contract Vulnerabilities & Logic Errors. The single biggest risk is flaws in the code that govern DeFi protocols. Examples include:

  • Reentrancy Attacks: Exploiting the contract’s withdrawal function to drain funds repeatedly before the balance can be updated.

  • Flash Loan Exploits: Using uncollateralized “flash loans” (borrowed and repaid in the same transaction block) to quickly manipulate the price of a token on one exchange and profit by selling it on another, before the price rebalances.

• Impact: Massive, often irreversible, loss of funds for users and crippling damage to the reputation and liquidity of the exploited protocol. The lack of a central authority means stolen funds are rarely recovered.