Decentralized Finance Faces Multiple Barriers to Mainstream Adoption

Decentralized Finance (DeFi) is a growing market popular with experienced crypto users. For the average non-tech investor, however, there are some barriers to mass adoption.

DeFi is a blockchain-based method of providing financial services that does not rely on centralized intermediaries, but uses automated procedures. These automated programs, known as smart contracts, enable users to automatically trade and move assets on the blockchain.

Protocols in the DeFi space include decentralized exchanges (DEXs), lending platforms, and yield farms. Since there is no centralized intermediary, it is easier for users to participate in the DeFi ecosystem, but it also increases the risk. These risks include vulnerabilities in the protocol codebase, hacking, and malicious protocols. Combined with the high volatility of the crypto market in general, these risks could make it harder for DeFi to gain widespread adoption among ordinary users.

However, workarounds and advancements in the blockchain space can address these issues.

Regulatory Issues in DeFi

Regulation can benefit the DeFi space, but it also conflicts with the core principles of decentralization. Decentralization means that a protocol, organization or application has no central authority or owner. Instead, a protocol is built by smart contracts that perform its primary function, and multiple users interact with the protocol.

For example, smart contracts are responsible for staking and exchanges with DEXs, while users provide liquidity for trading pairs.What regulators can do to prevent anonymous teams from increasing the value of tokens before they withdraw liquidity from the DEX, also known as pull the rug? Due to the decentralized nature of the DeFi ecosystem, regulators will face challenges when trying to maintain a degree of control within the space.

Despite the challenges, regulation is not completely out of the realm of decentralized finance. Q4 2021, Financial Action Task Force Published an updated version of their guide to the virtual asset file. The update outlines how DeFi protocol developers can be held accountable in a crisis.While the protocol may be automated and decentralized, the founders and developers Can be called as Virtual Asset Service Provider (VASP). Depending on their state, They may also need to be regulated.

Regarding the regulation within DeFi, the platform can also build protocols that meet regulatory requirements. Phree, for example, is a platform for building decentralized protocols while keeping regulatory issues in mind as much as possible. One of the ways they do this is by partnering with traditional financial entities to build DeFi protocols that meet standard regulatory requirements.This will require adding things like know your customer and Anti-money laundering checks to DeFi platforms such as DEXs and lending platforms. Additionally, due to the organization’s dominance in the TradFi space, making traditional finance (TradFi) compatible with the DeFi ecosystem will help promote its adoption.

Ajay Dhingra, head of research at smart exchange Unizen, told Cointelegraph, “Incompatibility with the traditional financial ecosystem is one of the main challenges. The CeFi regulatory framework needs to be linked with on-chain identities and real-time regulatory reporting so that financial institutions can use DeFi for digital Trillions of transactions.”

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Central Bank Digital Currencies (CBDCs) have been suggested as the answer to stablecoins Terra Algorithm Stablecoin Crash earlier this year. Swiss National Bank executive Thomas Moser previously told Cointelegraph Regulators may be inclined to centralize stablecoins more than decentralized. However, he also mentioned that it could take time and that current financial regulations could render the DeFi ecosystem obsolete due to conflicting principles.

Security concerns in the DeFi ecosystem

Security concerns are a major concern in the DeFi space, where malicious actors exploit vulnerabilities in bridge protocols and decentralized applications (DApps).

Adam Simmons, chief strategy officer at RDX Works, the builder of the Radix protocol, told Cointelegraph: “The dirty secret of DeFi right now is that there are tons of known security issues across the entire public ledger technology stack, as evidenced by billions of data. Dollars lost to hacking and exploits over the past few years.”

Exploits are still happening in the DeFi space.The most recent Nomad Token Bridge is valued at $160 million funds.Probably also Funding worth $1.6 billion Stolen from DeFi protocols this year alone. The lack of security in the DeFi space makes it less likely for new users to get involved, while discouraging people who fall victim to protocol vulnerabilities.

To address this, there needs to be a greater emphasis on censoring protocols within the space to find vulnerabilities before hackers can exploit them. There are already platforms like CertiK that audit blockchain-based protocols by examining smart contract code, so this is a good start. However, the industry needs to increase scrutiny of DApps before they go live to protect users in the crypto space.

User experience issues

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

In another example, the $1.2 million rock non-fungible token (NFT) is sell for less than a penny When users listed it for sale as 444 WEI instead of 444 Ether (Ethereum).these examples known as the fat finger bug, the user incurs losses due to errors in entering price or transaction fee values. For DeFi to be widely adopted by the masses, the process must be simple for ordinary people.

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

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Additionally, 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 in the transaction. If users don’t understand the process, they may use low gas settings and end up waiting hours to send transactions because gas fees are so low.

The process becomes more complicated when dealing with tokens built on networks such as ERC-20 and BEP-20 standards. When you transfer these tokens, you pay transaction fees in the cryptocurrency of the network they belong to. For example, if you are sending an ER-20 token such as USD Coin (USD/USD), you need to hold ETH in your wallet to pay for gas, which increases transaction complexity.

Developers in the DeFi space need to make the ecosystem more friendly to beginners and ordinary non-technical users of the space. Building wallets and DApps that prevent fat-finger mistakes (such as by automatically entering values) is a good start. This is already the case with centralized exchanges, but it needs to be introduced into decentralized platforms and non-custodial wallets for the DeFi sector to grow.