DeFi applications do not need any intermediaries or arbitrators. The code specifies the resolution of every possible dispute, and the users maintain control over their funds at all times. This reduces the costs associated with providing and using these products and allows for a more frictionless financial system.
But DeFi projects have disadvantages and risks at the same time.
Systemic risks:
Systemic risks in the DeFi sector are liquidity and credit risks. Another problem with DeFi systems using cryptocurrencies as collateral is volatility. If the price of the underlying assets locked in the project falls rapidly, massive asset liquidation occurs and the system may collapse.
The risk of hacking smart contracts:
While working with smart contracts in DeFi eliminates the need for human trust, there remains a need to trust the human-written smart contract code.
Centralizing data flow:
Blockchain protocols extract data from the outside world using oracles. If the oracle acts in a malicious manner, the correct execution of the smart contract will be at risk.