- Being in its infancy stage, DeFi has a lot of obstacles to overcome that require immediate attention.
- Bitfinex Whale Joe007 wrote DeFi projects are riskier than Ponzi schemes.
- The unpredictable markets that lie underneath the decentralized services lack insurance making it even riskier.
Decentralized Finance, popularly known as DeFi, is an ecosystem where lenders and borrowers meet with the help of an exchange. Borrowers get quick access to assets that lenders are willing to give up to receive regular returns. The tokenization of real assets like art and real estate combined with peer-to-peer marketplaces make it easy for all the parties. Moreover, the finances are devoid of a central issuer or a bank. Hence, it leads to several loopholes in the system that are enlisted below.
Obstacles faced by those in the DeFi ecosystem
Being in its infancy stage, DeFi has a lot of obstacles to overcome that require immediate attention. A flaw in any of the codes written on the smart contracts will lead to a loss of funds. Although policies are in place to prevent such mishaps there is no guarantee of a resurface. Crypto whale Joe007, responding to a tweet asking the reason for never investing in any Defi project, Joe007 wrote: DeFi projects are riskier than Ponzi schemes. Additionally, the unpredictable markets that lie underneath the decentralized services lack insurance making it even riskier.
The reasons are many, how about this one. DeFi projects are are more risky than Ponzi schemes. In addition to expected exit-scam by project founders they can be unexpectedly hacked by external players. https://t.co/L6lj6v4DVJ
— ʲᵒᵉ?️7 (@J0E007) July 19, 2020
New developers retain a majority of the control of the digital currencies which is a stark contrast with its decentralization feature. The problem of over-collateralization persists as lenders request a large sum of money from borrowers. Low liquidity combined with limited interoperability makes it difficult for users to move funds from one place to another.
What will make Decentralised Finance more attractive in the future?
The latest forms of interoperability like Atomic Swaps and pTokens should solve several problems. Cryptocurrency Exchange could make efficient use of bug bounties and currency audits. With government regulation already taking steps to enter the ecosystem, it is clear that the foundation will be much stronger shortly. A liquid market will offer quick and frictionless transactions that help transfer value across blockchain exchanges.
Experts are of the view that interoperability is one of the key hurdles that need to be overtaken. Hence, the idea of Atomic Swaps has taken birth but the project is still in its experimental stage. To raise investor confidence, the ecosystem could design a few decentralized liquidity pools to provide better flexibility to exchanges. Lastly, the above changes will improve the speed of transactions and the capacity as well.