Decentralized finance faces many barriers to mainstream adoption

Decentralized finance faces many barriers to mainstream adoption – Mail Bonus


Decentralized finance (DeFi) is a growing market popular among experienced crypto users. However, there are some barriers to mass adoption for the average non-tech investor.

DeFi is a blockchain-based approach to providing financial services that does not rely on central intermediaries but uses automated programs. These automated programs are known as smart contracts, which allow users to automatically trade and move assets onto the blockchain.

Protocols in the DeFi space include decentralized exchanges (DEX), lending and borrowing platforms, and yield farms. Since there are no central intermediaries, it is easier for users to participate in the DeFi ecosystem, but there is also an increased risk. These risks include vulnerabilities in protocol codebases, hacking attempts, and malicious protocols. Combined with high volatility in the crypto market in general, these risks can make it harder for DeFi to achieve widespread adoption among average users.

However, solutions and advancements in the blockchain space can address these concerns.

DeFi regulatory concerns

Regulation can benefit the DeFi space, but it also goes against the principles of decentralization. Decentralization means that a protocol, organization or application has no central authority or owner. Instead, the protocol is built with smart contracts that perform their main functions while multiple users interact with the protocol.

For example, smart contracts handle the staking and exchange with DEX, while users provide liquidity for the trading pairs. What can regulators do to prevent an anonymous team from inflating a token’s value before taking liquidity from the DEX, otherwise known as a doormat? Due to the decentralized nature of the DeFi ecosystem, regulators will face challenges when trying to maintain a certain level of control within the space.

Despite the challenges, regulation is not completely out of the picture for decentralized finance. In the fourth quarter of 2021, the Financial Action Task Force released an updated version of its virtual asset document guidance. The update outlined how DeFi protocol developers could be held accountable in a crisis. While protocols may be automated and decentralized, founders and developers may be called virtual asset service providers (VASPs). Depending on the state where they are based, they may have to set rules.

Regarding regulation within DeFi, platforms can also build protocols that comply with regulatory requirements. For example, Phree is a platform that builds decentralized protocols while addressing regulatory concerns wherever possible. One of the ways they do this is by working with traditional financial institutions to create DeFi protocols that meet standard regulatory requirements. This would include adding processes such as Know Your Customer and Anti-Money Laundering Checks to DeFi platforms such as DEX and lending or borrowing platforms. Additionally, making traditional finance (TradFi) compatible with the DeFi ecosystem would help spread its adoption due to institutional dominance in the TradFi space.

Ajay Dhingra, head of research at Smart Exchange Unizen, told Cointelegraph, “Incompatibility with the traditional financial ecosystem is one of the main challenges. There is a need to connect the CeFi regulatory framework with chain ID and real-time regulatory reporting so that Defi is accessible to financial institutions that trade in the trillions.”

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A central bank digital currency (CBDC) has been suggested as an answer to stablecoins after the Terra algorithmic stablecoin crash earlier this year. Swiss National Bank chief executive Thomas Moser previously told Cointelegraph that regulators may favor centralized stablecoins over decentralized ones. However, he also mentioned that it would likely take time and that current financial regulations could render the DeFi ecosystem obsolete due to conflicting principles.


Security concerns within the DeFi ecosystem

Security issues are a major concern within the DeFi sector, with malicious actors in the space exploiting weaknesses within bridging protocols and decentralized applications (DApps).

Adam Simmons, head of strategy at RDX Works – the builders of the Radix protocol – told Cointelegraph: “The dirty secret of DeFi right now is that the entire public ledger technology stack has a huge number of known security issues, as shown by the billions of dollars lost in attacks and exploits over the last years.

Vulnerabilities still occur in the DeFi space. Recently, $160 million worth of funds were drained on the Nomad token bridge. It is also estimated that $1.6 billion in funds have been stolen from DeFi protocols this year alone. The lack of security within the DeFi space makes it less likely for new users to join while discouraging people who have fallen victim to the methodology.

To combat this problem, more emphasis needs to be placed on checking protocols within the space to discover vulnerabilities before hackers can exploit them. There are already platforms like CertiK that perform audits of blockchain based protocols by checking the smart contract code, so that’s a good start. However, the industry needs to see increased scrutiny of DApps before they go live to protect users in the crypto space.

User experience issues

User experience (UX) is another potential roadblock for users who want to participate in the DeFi ecosystem. The way investors interact with wallets, exchanges and protocols is not a simple intuitive process, which results in some users losing their funds due to human error. For example, in November 2020, a trader spent $9,500 in fees to execute a $120 trade on Uniswap after confusing the “gas limit” and “gas price” input fields.

In another example, a rock hardwired token (NFT) worth $1.2 million was sold for less than a cent when a user listed it for sale at 444 WEI instead of 444 Ether (ETH). These examples are known as fat finger errors, where users lose money due to mistakes they make when entering values ​​for prices or transaction fees. For DeFi to be widely adopted by the masses, the process must be simple for ordinary, everyday people.

However, that is not currently the case. In order to use DeFi applications, users need to have a non-custodial wallet, or a wallet where they control private keys. They also need to back up the recovery and store it in a safe place. When interacting with a DApp, users need to link their wallet, which can sometimes be complicated, especially when using mobile wallets.

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In addition, when sending or receiving payments, users need to copy the addresses involved in the transaction and in some cases they need to enter the amount of gas they want to spend on the transaction. If a user does not understand this process, they could use a low gas setting and end up waiting hours for their transaction to be sent because the gas charge is so low.

The process becomes even more complicated when dealing with tokens based on networks such as the ERC-20 and BEP-20 standards. When you transfer these tokens, you need to pay for the transaction with the cryptocurrency of the network it belongs to. For example, if you want to send ER-20 tokens, for example, USD Coin (USDC), you need to have ETH in your wallet to pay for the gas, which increases the complexity of the transaction.

Developers in the DeFi space need to make the ecosystem more user-friendly for beginners and regular non-tech users in the space. Building wallets and DApps that prevent fat-finger errors (by inserting automatic values, for example) is a good start. This is already the case with centralized exchanges, but it needs to be introduced to decentralized platforms and non-custodial wallets for the DeFi sector to grow.