Decentralized finance (DeFi) is a developing industry that is well-liked by seasoned cryptocurrency users. For the typical non-technical investor, there are some barriers to mainstream adoption, nevertheless.
DeFi is a blockchain-based method of providing financial services that do not rely on centralized middlemen but rather use automated software. Smart contracts, which enable users to autonomously exchange and move assets on the blockchain, are called automated programs.
Decentralized exchanges (DEXs), platforms for lending and borrowing, and yield farms are also a few protocols in the DeFi field.
Users can participate in the DeFi ecosystem more easily because there are no centralized intermediaries, although there are also higher risks which might include hostile protocols, hacker efforts, and weaknesses in the code base of a protocol. Because of these risks, it makes it more difficult for DeFi to gain widespread adoption among common users, especially given the well-known volatility of the crypto market as a whole.
However, solutions and developments in the blockchain industry can definitely solve these issues.
Regulation Attempts on the Crypto Economy
Although regulation has advantages for the DeFi community, it also runs counter to the fundamental ideas of decentralization.
Decentralization refers to the absence of a central authority or owner in a protocol, organization, or application. Instead, a protocol is constructed with smart contracts that carry out its core operations as various users engage with it.
Despite the difficulties, regulation of decentralized finance is still a possibility. The Financial Action Task Force amended its document on virtual asset guidelines, which was published in Q4 2021. The update explained how DeFi protocol creators may be held responsible in an emergency.
The protocol’s creators and developers could be referred to as virtual asset service providers even if it is automated and decentralized (VASPs). They might also need to be regulated depending on the state in which they are located.
Platforms can also design protocols that adhere to legal standards in terms of regulation within DeFi.
To achieve this, DeFi platforms like DEXs and lending or borrowing platforms would need to incorporate procedures like Know Your Customer (KYC) and anti-money laundering (AMCL) inspections.
Due to the dominance of companies in the traditional finance (TradFi) industry, having TradFi interoperable with the DeFi ecosystem would also aid in spreading its acceptance.
According to Ajay Dhingra, head of research at smart exchange Unizen, “One of the biggest problems is compatibility with the traditional finance ecosystem. To make Defi available to financial institutions that deal in trillions, the CeFi regulatory framework needs to be connected with on-chain IDs and real-time regulatory reporting.
In the DeFi industry, security concerns are a top priority since nefarious actors are exploiting holes in bridge protocols and decentralized apps (DApps).
“The dirty secret of DeFi right now is that the entire public ledger technology stack has a huge number of known security issues, as demonstrated by the billions of dollars lost in hacks and exploits in the last few years,” Adam Simmons, chief strategy officer of RDX Works, the company that created the Radix protocol said, which was reported by CoinTelegraph.com.
DeFi’s lack of security discourages those who have been harmed by protocol attacks and discourages new users from joining the community.
Another potential barrier for users that want to participate in the DeFi ecosystem is user experience (UX).
Investor interaction with wallets, exchanges, and protocols is not always simple or intuitive, which causes some users to lose money due to human error.
The crypto data aggregator recently published its Q2 2022 Cryptocurrency report, revealing that the DeFi sector went off the edge, mainly due to Terra’s cataclysmic collapse.
A bigger emphasis needs to be placed on vetting methods in the area to find vulnerabilities before hackers can exploit them in order to mitigate this issue.
It’s a good start that there are already tools like CertiK that perform audits on blockchain-based protocols by examining the smart contract code. To safeguard users in the cryptocurrency realm, the sector needs to see enhanced audits of DApps prior to their launch.
DeFi hacks accelerate the market decline
A recent report of CoinGecko emphasized that the current market conditions in DeFi-related attacks had a negative impact on investors’ faith in various native protocols, thus exacerbating the market’s downturn.
The Ethereum-based DeFi lending system Inverse Finance, which was attacked twice in only three months and saw the theft of digital assets valued at over $17 million was mentioned in the report. It also referenced the $80 million May attack on DeFi lender Rari Capital.
According to CoinGecko, “These assaults have had a detrimental influence on token pricing as investors lose faith in these hacked protocols.”
What users can do
Users need to have a noncustodial wallet or a wallet where they have control over the private keys, in order to utilize a DeFi application. Additionally, they must safeguard the recovery phrase and maintain it in a secure location.
Users must link their wallets in order to interact with a DApp, which can occasionally be challenging, particularly when using a mobile wallet.
They must also copy the addresses involved in the transactions when sending or receiving money, and in some situations, they must input the amount of gas they intend to spend on a transaction. Because the gas charge is so cheap, if a user doesn’t understand this procedure, they can pick a low gas setting and have to wait hours for their transaction to be sent.
When working with tokens created on networks like the ERC-20 and BEP-20 standards, the process becomes much more difficult, users must use the cryptocurrency of the network to which these tokens belong to complete the transaction when transferring them.
For instance, holding ETH in your wallet to cover the gas increases the complexity of the transaction if you want to transmit an ER-20 token, such as USD Coin (USDC).
DeFi market capitalization
Today, Defi contributes only $60.47 billion to the overall crypto market share of over $1.15 trillion.
With over 548 DeFi projects already in the public domain, only 10 projects that include Dai, Uniswap, Wrapped Bitcoin, Chainlink, Tezos, Theta Network, Aave, Maker and Fantom command over $1 billion market capitalization.
Klever can really assist to make DeFi a secure place, as it has all the technology and products that can provide users with military-grade security features that are lacking in many DeFi protocols.
Think crypto, Think Klever!