If you are interested in finance and cryptocurrencies, you are no stranger to the word DeFi (Decentralized Finance). The finance industry is abuzz with decentralized finance technology, which many believe is the next step of evolution for the mainstream financial sector.
DeFi joined the finance conversation in February 2020 when the sector first surpassed one billion dollars in Total Value Locked (TVL). The TVL of the DeFi sector closed the year at thirteen billion dollars representing a 2000% growth.
This means that the dollar value of assets locked in DeFi protocols was over thirteen billion dollars in their first year of mainstream activity. According to DeFi Pulse, the TVL now stands at fifty-nine billion dollars.
However, as exciting as that is, many challenges are standing in the way of DeFi becoming mainstream in the financial industry.
What is Decentralized Finance (DeFi)?
Decentralized Finance is an ecosystem of financial products integrated with blockchain protocols. DeFi products offer their clients access to financial services with the added benefit of blockchain technology.
Users get the safety, transparency, and decentralization provided by the blockchain protocols, which are preferred to the systematic secrecy of the mainstream financial system.
While some DeFi products like the various stablecoins are designed to run parallel to the centralized financial system, most DeFi products are reinventing the financial industry altogether, offering users new solutions like liquidity mining, also known as yield farming.
Liquidity mining offers owners of crypto assets incentives to lock their assets into the network to create liquidity for the blockchain protocol and enabling it to lend to users.
This helps cryptocurrency holders make a return on their portfolio without actively trading. Other DeFi platforms’ services include decentralized loans, decentralized asset management, cryptocurrency exchanges, and decentralized insurance services.
Top 4 challenges facing DeFi in 2021
Like every new sector, DeFi platforms have many hurdles to overcome before they can compete favorably for market share with the centralized financial sector. Here are the four main challenges facing DeFi in 2021.
Hacks and Scams
As safe and secure as the blockchain protocols are, they are not 100% safe against hackers.
According to a report by CypherTrace, crypto crime led to losses of about 432 million dollars as of the end of April. 56% or 240 million dollars of those losses were attributed to DeFi platforms, a record for the sector.
In 2020, losses in the crypto sector due to fraud and scams totaled 1.9 billion dollars. This was massively down from 5.4 billion dollars in 2019.
This level of fraud activity is expected to go down as the sector matures and users become well versed in how to tell scams on the platforms and as regulators step in to make financial regulations and oversee financial activity on the DeFi platforms.
High fees and charges
The cost of participating in the DeFi sector is still really high. Many of the DeFi platforms are housed on the Ethereum Blockchain, which has created a monopoly in the DeFi sector.
The DApps can charge high ‘Gas Fees’ because users don’t have many alternatives.
Furthermore, many DeFi platforms are limited in the number of transactions they can make a day which means that the only way to maximize revenues is by hiking up the transaction fees.
Users on Compound and Aave, have to pay about $50 to $100 for a single transaction.
This is a challenge that crypto experts always feared DeFi platforms would run into. Because each transaction on a DeFi platform has to be blocked and recorded on the blockchain’s distributed public ledger, there is a limit to how many transactions can be made at a time.
This public distributed ledger is a feature that ensures the safety and authenticity of crypto transactions, but that level of security comes at a massive cost.
Many companies like Relite are already innovating solutions to this problem. It is safe to say that this won’t be a challenge for much longer, but it is still one in 2021.
Poor UX Design
DeFi platforms suffer from poor UX design, limiting mass adoption by non-technical users.
Most of the DeFi platforms are developed to the minimum viable product specification, which usually means that they have the function they are supposed to but not the user interface necessary for a good user experience.
This can be attributed to how relatively new the DeFi sector is. Most developers built their first versions as proofs of concept and feasibility and not market-ready products for mass adoption.
As the industry grows and becomes more mainstream, the users will demand more user-friendly interfaces and developers will have to respond.
Gerald Ainomugisha is a freelance Content Solutions Provider (CSP) offering both content and copy writing services for businesses of all kinds, especially in the niches of management, marketing and technology.