#DeFi – All the problems, some of the solutions

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Cryptocurrencies emerged as a solution to the 2008 global crisis problem – inequality and inefficiency of traditional financial institutions. Since the introduction of Bitcoin, the advent of blockchain technology in the financial world has increased its decentralization, creating a new world of decentralized financial services, also known as DeFi.

However, there are a few things that keep DeFi from becoming popular, despite its many advantages. Blockchain technology has brought several new developments to our world, including decentralized financing.

Thanks to the DeFi ecosystems, there are now more decentralized and peer-to-peer networks for financial banking and lending, as well as advanced financial instruments. Despite the remarkable success of these ecosystems, DeFi is still in its infancy.

DeFi vs. Fintech

FinTech is a trend area today; Dozens of FinTech startups have been founded around the world in the past few years. At the heart of FinTech is the idea of ​​using innovation to improve the delivery of financial services. This is why it is argued that decentralized funding is the same as FinTech.

Yes, both FinTech and DeFi aim to create financial inclusion, efficiency and freedom from technology. As of March 2021, the total locked value (TVL) is $ 49.70 billion, the total adjusted block value is $ 55.93 billion, and the number of unique active wallets for 24 hours is 40.59.

However, one of the main extraordinary differences between FinTech and DeFi is that FinTech solutions are centralized. At the same time, DeFi apps are open source systems that run autonomously without the support of a central authority or company.

DeFi Apps feature a new approach to open source finance that allows many services to run on the blockchain. The internet is a great example of how DeFi works.

The main advantages of DeFi

One of the main advantages of DeFi is the unlimited funding option. DeFi applications apply practical solutions for countries in the world that do not have a normal banking system. DeFi Apps provide access to financial services in African countries that were not previously available.

Banks still rely on IDs and credit ratings to verify customers. With DeFi apps, users don’t need a bank ID or credit rating to use financial services.

This gives everyone the opportunity to take advantage of financial services. Given the current pandemic, DeFi solutions could be a much more efficient and effective alternative to generating a universal basic income from governments. With DeFi, millions of people could get government funding in no time.

Challenges of decentralized finance (DeFi)

Decentralized markets have their own advantages and disadvantages. While DeFi has many potential advantages, the disadvantages hinder mainstream adoption.

All of the issues listed below keep the decentralized financial system from widespread adoption, but some investors don’t care. The serious risks to the DeFi ecosystem come from smart contracts, lack of credit insurance, user error, and asset liquidity.

Vulnerability of smart contracts

Since smart contracts are intermediaries for DeFi systems, their weak points can affect the functioning of DeFi ecosystems. Smart contracts are programmable algorithms that are prototypes of traditional (real) contracts.

A smart contract controls the execution of the contract between the two parties after the conditions have been concluded. However, the presence of a bug or bug in the code can result in the loss of funds that are locked in the smart contract.

Yes, smart contracts make it very easy for the parties to perform the contract, but mistakes in the code can lead to significant problems. Another significant problem is user error. If the user uses the wrong address to send money, they will not be able to return it.

The so-called reentrancy attacks are widespread in the smart contract system, which also represents a significant obstacle to the automation of all finances. In addition to reentrancy attacks, DOS attacks are very common. DeFi systems are very vulnerable to DOS attacks.

If a broken smart contract ends up in the DeFi ecosystem, it can lead to a serious loss of funds and financial data. Another mistake that can result from a smart contract vulnerability is user error. Mistakes like this have resulted in people losing millions of their money.

For example, a developer mistakenly took control of hundreds of wallets and destroyed them to give them back to their owners. It was a long time ago, 2017, but the story is still popular today.

Another story – the developers were trying to fix a bug in the code that led to their hacking and the loss of $ 32 million. These guys unwittingly transferred ownership of all of their assets to one person and were unable to repair what they had done.

The unpredictability of the DeFi market

The unpredictability of the market is the second problem that is very discouraging for investors and traders. Because cryptocurrencies are so volatile, the DeFi market further encourages this shortage of digital coins.

As a result, investors can lose a lot of money in the sharp ups and downs in prices, even if everything is technically in order. Due to the volatility and unpredictability of the market, many people are reluctant to accept cryptocurrencies as a stable form of measure of value.

In addition, the value of each cryptocurrency can vary in different ways, making it difficult to choose a specific currency for financial transactions. DeFi will only increase market volatility and scare off large investors.

Regulatory issues

There is no precise regulation of the decentralized financial system in the world. Since governments or central banks have no control over transactions, most people do not trust the system. In addition, local governments in some countries can ban cryptocurrencies without notice. This is one of the main problems in the DeFi system.

Due to the lack of regulation, the likelihood of criminal activity is also high. Because the system provides anonymity, anyone can send or receive money without revealing their name, which gives criminals more options.

Low liquidity

The world of cryptocurrencies is filled with thousands of digital currencies, which creates additional difficulties with withdrawals. Difficulties can also arise when exchanging cryptocurrencies due to low liquidity.

As a result, you may not get money on time, which is a big problem in a decentralized financial system. While many digital currency advocates argue that cryptocurrencies are highly liquid assets, only a few digital assets are. As a result, you cannot freely exchange your wealth, which makes the financial system ineffective.

Credit problems

Due to the high volatility of cryptocurrencies, obtaining loans is difficult. In most cases, lenders are willing to offer loans but require very high levels of collateral. This puts the borrower in a difficult position in borrowing. Another problem is the lack of credit insurance.

DeFi ecosystems have not been able to eliminate this threat. The availability of urgent credit is a big problem. Attackers can get hundreds of thousands of dollars on one loan. In the absence of loan intermediaries, DeFi ecosystems expose investors to the risk of losing money from untrustworthy customers.

DeFi bug fix

There are other markets and systemic factors influencing the adoption of DeFi systems. DeFi is not a fully decentralized system as it is more or less controlled by developers. Your job is to develop and fix any problems related to DeFi.

Developers who are central providers of DeFi solutions make it more difficult to decentralize the system and make financing more difficult. Another problem with DeFi’s reliance on developers is that they can be dishonest and misuse customer funds.

Many are trying to find possible solutions to all of the above risks and problems. Weaknesses and errors in smart contracts are gradually being resolved. Governments can enact regulations that govern digital assets. It may be more important now to focus on deployment
better liquidity and volatility.

Atomic Swaps are also the solution to DeFi’s problems. They enable the direct transfer of liquidity from one blockchain to another. Some may argue that the obvious way to solve the decentralized funding problem is to work with DeFi.

The approach is perfectly reasonable, but not without its drawbacks.

Therefore, tokens continue to compete within such a “confederation” of projects for the attention of users and, accordingly, for participation in DeFi. That said, the problem of flooding the market with a wave of highly specialized tokens will not be resolved, as will the problem of overloading the higher-level blockchains.

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