Fuse Earn enables users to earn a yield on their stables using DeFi protocols while keeping their assets behind Fuse’s programmable security and eliminating risks associated with external phishing links and malicious websites.

However, it is important to understand that there are always additional risks associated with depositing assets in DeFi protocols that could result in the loss of funds.

Here is an overview of how DeFi lending and borrowing markets work and some of the risks involved.

Depositing Assets to a Money Market

When you deposit assets into a DeFi money market, they are added to lending pools and earn yield based on variable borrow interest rates. These interest rates are dynamic and vary based on how each protocol’s mechanism works and the supply vs. borrow demand of a particular asset. 

Borrowers can access liquidity from these pools by depositing collateral assets (e.g. SOL) and borrowing another token (e.g. USDC) against their collateral. The borrowed amount is always less than the collateral's value to ensure the loan remains overcollateralized.

Risks Associated with Money Markets

While most prominent DeFi applications are extensively audited and stress tested to ensure safety, there are some common risks associated with money markets:

1. Smart Contract Risk: All lending pools in a DeFi protocol are managed by smart contracts. These contracts can have vulnerabilities or bugs that attackers might exploit, potentially leading to a loss of funds.
   
   

2. Bad Debt Risk: Borrowers might default on their loans, meaning they don’t repay the borrowed asset. If the underlying collateral is worth more than the loan, there is no bad debt and this is called a secured default. If the underlying collateral is worth less than the loan then the protocol experiences bad debt. A high rate of unsecured defaults can lead to protocol insolvency, where the liquidity pool lacks sufficient funds to cover all depositor withdrawals. This scenario can result in losses for depositors.
   
   

3. Oracle Risk: DeFi protocols often rely on oracles to provide external data, like asset prices. If the oracle is compromised or provides incorrect data, it can trigger unintended liquidations or other issues within the protocol.
   
   

4. Regulatory Risk: As the regulatory environment around DeFi evolves, there is a risk that new regulations could impact the crypto ecosystem, potentially affecting a user’s ability to access certain applications or centralized crypto assets (e.g. USDC). Onchain protocols reduce this risk as the code is permissionless and onchain, but regulation could affect application frontends and services.

Protocols place several guardrails to reduce these risks, such as multiple audits, asset caps, auto-deleveraging, advanced liquidation engines, and permissionless code. However, it is impossible to remove all risks from the system.

While Fuse Earn exclusively partners with Solana's top-tier DeFi protocols, it's crucial to understand that Fuse cannot eliminate or guarantee against the inherent risks described above.