What are the possible risks involved?
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As with all investments, there are risks associated with using our Lending service and it is important that you understand these risks.

Depegging risk
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Most DeFi protocols may issue derivative tokens that act as receipt of the crypto assets deposited by users. In certain cases, the derivative tokens may depeg from expected exchange rates (when redeeming these derivative tokens back into the original crypto assets) due to factors beyond Bake’s control.

Smart contract risk
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While smart contracts of the DeFi protocols, where your crypto assets are allocated to, may be audited by multiple smart contract auditing providers, there may still be a risk of highly sophisticated attacks that would have been otherwise undetected during the audits.

Counterparty risk
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Multiple parties are involved when allocating your crypto assets onto DeFi protocols. For example, DeFi protocols are often controlled by their own decentralized organisations or DAOs as commonly known, whose governance processes may allow the DAOs to control or to stop any withdrawal of crypto assets. You may be exposed to such counterparty risk in such a case.

Liquidity risk
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Some DeFi protocols have mechanisms or controls where withdrawal of funds can be paused or restricted if there isn’t enough funds to be withdrawn, in order to protect the protocol.

For example, as crypto assets allocated into lending market protocols like Compound or Aave as collateral can be borrowed by other users, there can be cases where Bake might be unable to withdraw our funds if the protocol liquidity (e.g. the total amount of token supplied that has not been borrowed out) is less than the total crypto assets.

Fluctuating reward rate risk
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Past performance of a DeFi protocol’s yield is not indicative of future results. Rates shown to you are typically floating rates (and not fixed), and may fluctuate depending on many different factors depending on how the DeFi protocol mechanics work. You may get a higher or lower yield on your crypto assets compared to the previous term.