Have you also seen those posts that say "deposit BTC and earn while you sleep"? Wake up. Before you put your money into a BTCFi vault, you should at least know what you are signing.
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These seven risks are not something you are advised to understand. You must check them. It is not that you should avoid BTCFi after checking, but that after checking you will know what you are actually betting on.
Risk 1: Token approvals — the biggest security hole
It is not a bridge hack or a smart contract attack. The biggest reason BTCFi users lose funds is unlimited approvals. Many token operations require you to approve a "spender" to use your assets. If you approve an unlimited amount, that permission stays forever until you actively revoke it. If that contract is later attacked, or if the approval target is a phishing site, it can empty your wallet at any time without asking you again.
[What to do]: Check the approval amount you have given to every protocol and every token. [How to do it]: Use approval management tools on Ethereum and L2s, such as Revoke.cash or Token Approval, to view and revoke approvals you no longer need. Keep most of your assets in a cold wallet, and use a separate hot wallet for BTCFi operations.
Risk 2: Custody and reserve authenticity
The old saying "Not your keys, not your coins" still applies in BTCFi.
Behind many LSTs or wrapped BTC products, your native coins are held by a group of signers or a custodian. If they are hacked or compromised, your BTC may be stolen directly. A more hidden risk is depegging, meaning the asset is not backed by enough native BTC reserves, or there is even an "over-issuance" problem.
[What to do]: Check whether the asset has 1:1 proof of reserves, especially whether it is verified by an objective third party such as Chainlink. [How to do it]: Go to the project's official website and look for the PoR or reserve proof page. If it claims to have $754M TVL but you cannot find a clear, real-time, verifiable address list, that is a huge red flag.
Risk 3: Yield source — where does the money actually come from
If the project cannot clearly explain where the yield comes from, then you yourself become the yield source.
[What to do]: Check which part of the APY you see is real yield and which part is inflated by points expectations. [How to do it]: Strip out the "points" part. Only count what has already been earned and can be converted to cash at any time. For example, Babylon native staking has a baseline annual yield of only about 0.03%. After deducting gas fees, staking 1 BTC for a year may earn you only a dozen dollars or so. Do not be fooled by packaged "high yield".
Risk 4: Cross-chain bridge risk
"Cross-chain" is the weakest link in BTCFi. Once assets start moving across chains, they leave the security of the Bitcoin network and are handed over to the bridge's smart contracts. In April 2026, Kelp DAO's cross-chain bridge was attacked, losing $292 million and directly shaking the industry. Many projects are now migrating from LayerZero to Chainlink CCIP.
[What to do]: Check which cross-chain bridge solution the protocol uses. [How to do it]: Find its cross-chain solution. If it is a project like Lombard and has already migrated to the safer Chainlink CCIP, the risk is relatively manageable. If it uses an old or unaudited solution, be highly alert.
Risk 5: Liquidation and cascade risk
The collateral in BTCFi is usually just BTC. Once the BTC price crashes, all borrowing positions using BTC as collateral may face liquidation at the same time. This cascade liquidation can quickly push the price lower, causing more positions to be liquidated and creating a death spiral.
[What to do]: Check the liquidation line and evaluate the single-collateral risk. [How to do it]: Find out the protocol's initial loan-to-value ratio and liquidation LTV. Calculate how far BTC would need to fall before your position gets liquidated. If the liquidation price is less than 20% away from the current price, the risk is extremely high. For protocols like BTCFi CDP that only use BTC as collateral, the C+ (42/100) risk rating is not unreasonable.
Risk 6: Smart contract and external protocol risk
When you deposit assets into a vault, they may be deployed to multiple external protocols to earn yield. The protocol itself may have been audited, but the more layers of nested strategies there are, the more risk points there are. If any one of those external protocols has a problem, your funds may be affected.
[What to do]: Check the vault's strategy documentation. [How to do it]: Find the "Vault Strategy" or "Deployment" page and see how many external protocols the funds are deployed to. In Lombard Vaults' B- (35/100) rating, the highest risk is "external protocol attacked, risk passed on to depositors". If there are more than 3 external protocols, the risk rises sharply.
Risk 7: Slashing and protocol-level failure
Native staking protocols like Babylon do not custody your private keys, but they use cryptographic rules to constrain validators. If a validator breaks the rules, your BTC may be slashed, and part of it may be burned. Even more worrying is a serious vulnerability in the protocol itself — Babylon once had a "critical bug scare" that triggered a mass unstaking wave.
[What to do]: Check the protocol's history and slashing mechanism. [How to do it]: Look at whether the protocol has had security incidents or controversial events. Check its "Track Record" score on risk rating platforms like Hindenrank. If the score is low, its operating history is not very clean.
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What should you do next?
Spend ten minutes and use these seven items to examine the project you plan to invest in. If you cannot even clearly understand these seven cards, do not put real money in yet. First understand what you are betting on, then decide whether to place the bet.
