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Finance is the art of risk management. Risks exist in both assets and operations. An asset has a price, price is a reflection of its intrinsic value and synthesized risk. We can’t evaluate an asset without looking into its risk. The risks in operations are mainly from humans who are error-prone and corruptible. The evaluation of asset and operation risk is at the core of finance, no matter whether referring to traditional finance based on traditional assets or shiny new decentralized finance (aka. DeFi) running on native crypto assets.

Damage Control is the Key

The risk of crypto-assets is comprised of external risks such as regulation changes, and internal risks such as design flaws and implementation bugs. On Ethereum, the native asset is ETH, and the non-native assets are what we call ERC tokens, which refers to tokens that comply with any one of ERC20 standards and its companions such as ERC721 and ERC777 etc. The risk of the native asset is lower than the risk of a non-native asset because the latter can be affected by both Ethereum client bugs and smart contract bugs. For ERC tokens and DeFi, bugs in a smart contract are of the highest concern because DeFi as a system is a complicated network weaved together through endless smart contracts created by different developers from different places. We call the risks caused by smart contract bugs smart contract risks.

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Jan Xie

Live in future.

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