In this context, cryptocurrency wallets are DeFi lending protocols—platforms that allow depositors to contribute tokens to a pool to earn yield, while issuing loans to traders or other participants and profiting from the interest rate differential.
The popularity of these crypto savings products stems from a wide range of yield options: basic options offer 3% to 10%, while more aggressive ones can reach 20% or higher—significantly exceeding the rates of most other tools in the decentralized finance market, such as staking. Major depositors include fintech companies with large stablecoin balances, specialized crypto asset management firms, and hedge funds.
However, these are also where the main risks of platforms lie, according to Blockworks experts: in the event of expensive loans and a decline in collateral value, positions are automatically liquidated, which can trigger investor panic and a collapse in asset price. Additionally, many depositors focus solely on the promised yield and overlook other parameters, analysts note.
Due to intense competition, platforms are forced to complicate their strategies by adding rare tokens, increasing risk due to low liquidity and lack of transparency in underlying assets. If the pool lacks sufficient liquidity, investors could lose money. Analysts cited an example: one of the most popular vaults on the Morpho platform issues USDG stablecoin loans collateralized by tokens with non-standard backing—including a stablecoin backed not by fiat currencies but by other crypto assets, as well as a token representing a pool of tokenized private loans.
Due to these risks, in July the U.S. Securities and Exchange Commission (SEC) announced its intent to determine whether crypto custodians fall under securities laws. This means operators of such platforms could be treated like traditional asset managers and become subject to strict regulation.
Blockworks experts reminded users of past crypto wallet breaches. The Resolv protocol breach triggered a price collapse for several tokens. In some wallets, the USR token was used as collateral with a fixed price of $1. Due to this system setting, the platform failed to recognize the actual drop in the asset’s value following the attack.
A month ago, the decentralized finance protocol FlamingoFinance lost $346,000 due to a flash loan attack. Hackers used an $18 million USDT flash loan to inflate the transaction amount and exploit a pricing vulnerability, according to Blockaid analysts.