By briefly looking back at how far finance has gone, we can better appreciate the appeal of incorporating the term “Decentralized” into as many financial contexts as feasible.
The blockchain technology that DeFi projects rely on also presents many challenges and dangers. We will treat the Ethereum tasks as DeFi challenges because more than 90% of DeFi applications are built on the Ethereum blockchain.
Uncertainty
When a DeFi initiative is hosted on an unstable blockchain, the project will also become unstable. Mistakes made in the transition from PoW to the upgraded Eth 2.0 PoS scheme, for example, could increase the dangers facing DeFi applications while the Ethereum platform is still experiencing many changes.
Scalability
The durability of the underlying cryptocurrency is another significant issue for DeFi initiatives.
Due to the inability to scale, there are two primary issues to consider:
- a) payments take ages to be verified
- b) Trades are particularly expensive at moments of constraint
Ethereum, at its peak performance, can handle roughly 13 transactions a second, while centralized alternatives can handle thousands.
Smart Contract
The security of smart contracts is a common problem area for DeFi initiatives. A smart contract’s money is at risk if the code is even slightly flawed. Consumers can also seek financial aid from trading bots like cryptorobo and gain essential trading insights.
Liquidity
One of the most crucial aspects of DeFi token-based projects and blockchain systems is their liquidity. By October 2020, DeFi will have secured a total value of over $12.5 billion. Compared to more conventional financial systems, this is negligible.
Over-collateralization
We’ve already established that the crypto lending industry is a promising sector in DeFi. However, over-collateralization is a problem for this company since it arises when the value of the asset pledged (by the borrower) is disproportionately high in comparison to the loan amount. Due to the elimination of barriers like credit ratings, DeFi projects require substantial collateralization.
Related: What Is DeFi 2.0 in 2022…and How Does It Work?
Interoperability
Bitcoin, Ethereum, and the Binance Smart Chain are just a few examples of the many blockchain technologies, each having its own DeFi environment and community. Platforms, utilities, DApps, including smart contracts for DeFi may communicate with one another and with other blockchains thanks to interoperability. Many initiatives are separated into silos because of this.
Wrapping It Up
Even if there are no faults or dangers with DeFi, you cannot hold it liable for any errors you make. When using DeFi, users take on the role of mediators. Since no one would be held accountable in the event of accidental loss of funds, it is crucial that the DeFi community develop methods to mitigate the risk of such mishaps. Many users aren’t accustomed to having to look out for themselves in this way, and as a result, they may lose money or fall victim to a scam because they weren’t prepared to handle the responsibilities that came with their newfound independence.
DeFi is still in its early stages of development and as such, has challenges and obstacles, most notably in the area of security. Those working on and supporting decentralized financial systems believe these issues can be addressed in due time.
