Credefi - Mitigating The Risks Of Investing In DeFi

The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.
Today we would like to touch upon a topic, which is heavily overlooked by the major DeFi players in the industry.

We all know investing in all forms of DeFi can potentially bring lenders sustainable returns and on the contrary, reliable and low-fee loans for borrowers.

However, all DeFi platforms, that promise high APY’s for their lenders, have one substantial flaw - they cannot guarantee bear scenario gains and security to their users. Fortunately, Credefi steps in on this one - the first DeFi platform in the world that adopts a robust hybrid approach towards the fundamentals of financial stability and security.

Let’s talk about the most important aspect of investing in general - the risk/reward ratio.

This is something everyone needs to fully understand and how Credefi manages to masterfully balance it, through its groundbreaking fundamentals.

Our approach aims to almost fully mitigate the risk everyone accepts when embarking on the journey called “Investment”.

Generally, most of us know that the more risk one takes, the higher the potential returns, and vice-versa. We at Credefi would like to make sure all of our users take well-informed investment decisions, fully based on their risk appetite.

So, buckle up, friends, and let’s examine the 4 potential risk/reward scenarios you may face when investing with Credefi:

Example 1 - (Very low-risk appetite)

Let’s say you, as a user, decide to invest 150 DAI in a very conservative, low-risk portfolio, which contains a total amount of 100,000 DAI in low-risk loans.

In this scenario, there is only a 5% calculated risk that a small portion of the loans in the portfolio will go into default. This means that there is a monetized risk of default for only 5000 DAI out of the entire portfolio with a 100,000 DAI balance.

Let’s assume that, indeed, loans worth 5000 DAI (5%) in the portfolio actually default. In this case, your portion of the loss is calculated in the following way:

This means that you have lost the amount in red from your principal investment and you are left with 150 – 0.01125 = 149.98875 DAI

However, in order to mitigate the 5% risk of default, Credefi guarantees a minimum of 10% interest on the your principal investment. This means, that even if you lose the 0.01125 DAI out of your principal investment, you will still receive the 10% DAI interest on the remaining 149.98875 DAI:

At the end of the investment period, you will be left with a total repayment of:

FAQ:

Is there a chance that more than 5% of the loans in the Portfolio default?

In theory, yes, but the probability is negligible. These portfolios contain the lowest risk possible. Even if this happens, the 10% minimum interest works in the same way as described above.

Is it possible that all the loans in the Portfolio default and I lose all of my principal investment?

The chance of this happening is more or less the same as if you invest in a conventional bank deposit and the bank goes bankrupt. Such risk is not 0%, but if you are worried about such scenarios – all we will say is, that diversification is the key to financial responsibility in any real-life situation.

Example 2 - (High-risk appetite)

Let’s say you, as a user, decide to invest 150 DAI in a high-risk portfolio, which contains a total amount of 100,000 DAI in high-risk loans.

In this scenario, there is a 40% calculated risk that a portion of the loans in the portfolio will go into default. This means that there is a monetized risk of default for 40,000 DAI out of the entire portfolio with a 100,000 DAI balance.

Let’s assume that, indeed, loans worth 40,000 DAI (40%) in the portfolio actually default. In this case, your portion of the loss is calculated in the following way:

This means that you have lost the amount in red from your principal investment and you are left with 150 – 0.09 = 149.91 DAI

Credefi forecasts an approximate 40% interest on your principal investment. This means, that even if you lose the 0.09 DAI out of your principal investment, you will still receive the 40% interest on the remaining 149.91 DAI:

At the end of the investment period, you will be left with a total repayment of:

This would still result in a 39.9% effective return on your initial investment.

Note: Although the above portfolio is considered a high-risk one, the probability of loans amounting to more than 40% to effectively default is very low, due to Credefi’s 3-layer security module and strict monitoring of collateral credibility!

Example 3 - (Extremely high-risk appetite)

Let’s say you, as a user, decide to invest 30,000 DAI in the highest-risk portfolio available on the platform, which contains a total amount of 100,000 DAI in very high-risk loans.

In this scenario, there is a 40% calculated risk that a portion of the loans in the portfolio will go into default. This means that there is a monetized risk of default for 40,000 DAI out of the entire portfolio with a 100,000 DAI balance.

Let’s assume that, indeed, loans worth 40,000 DAI (40%) in the portfolio actually default. In this case, your portion of the loss is calculated in the following way:

This means that you have lost the amount in red from your principal investment and you are left with 30,000 – 3,600 = 26,400 DAI

Credefi guarantees a stable 10% interest on your principal investment. This means, that even if you lose the 3,600 DAI out of your principal investment, you will still receive the 10% interest on the remaining 26,400 DAI:

At the end of the investment period, you will be left with a total repayment of:

Evidently, the final amount above is less than the initial investment in the portfolio. However, such outcome is extremely unlikely to occur in reality, due to Credefi’s multi-layered investment strategies, where users will be able to hedge fully against such scenarios by diversifying their risk effortlessly. Furthermore, the sophisticated methodology for loan approval on the platform will additionally increase portfolio credibility and safety.

Example 4 - (Moderate high-risk appetite)

Let’s say you, as a user, decide to invest 5000 DAI in a moderate-risk portfolio available on the platform, which contains a total amount of 100,000 DAI in moderately high-risk loans.

In this scenario, there is a 6% calculated risk that a portion of the loans in the portfolio will go into default. This means that there is a monetized risk of default for 6000 DAI out of the entire portfolio with a 100,000 DAI balance.

Let’s assume that, indeed, loans worth 6000 DAI (6%) in the portfolio actually default. In this case, your portion of the loss is calculated in the following way:

This means that you have lost the amount in red from your principal investment and you are left with 5000 - 15 = 4985 DAI

For the moderately high-risk portfolios, Credefi will be able to achieve an approximate 40% interest on your principal investment. This means, that even if you lose the 15 DAI out of your principal investment, you will still receive the 40% interest on the remaining 4985 DAI:

At the end of the investment period, you will be left with a total repayment of:

This would still result in a 39.58% effective return on your initial investment.

Image Sourced from Pixabay

The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. This content is for informational purposes only and not intended to be investing advice.