Decentralized finance, or DeFi, is a term that encompasses a wide range of products and technologies that help manage finances in a more innovative way without the intervention of the central bank and financial institutions.
Decentralized applications, commonly referred to as DApps, are built on blockchains of cryptocurrencies such as Ethereum and Bitcoin. The main advantage of DeFi is the ability to use smart contracts, which provide complete control over finances. DeFi applications are widely used in the field of personal savings, settlements and investments, lending, margin trading, market forecasting, etc.
With DeFi tools, users gain access to services provided by centralized enterprises. The main idea behind the launch of DeFi is to make the entire process of interacting with finance safer and more efficient than traditional finance solutions. Despite the fact that DeFi is much more effective than other financial solutions, there are still certain obstacles in the field that can turn into serious problems.
Main problems of the DeFi sector
DeFi's main risks are related to user errors, bugs in smart contracts, lack of transparency in insurance, pricing mechanisms, etc. Despite all the benefits of DeFi, the initiative is still young and vulnerable.
Vulnerabilities in smart contracts
One of the major challenges facing DeFi is vulnerabilities in smart contracts. If a contract is released with errors in the code, then this could threaten with a loss of funds. There have been cases when exactly these problems with the smart contract led to the compromise of the blockchain. A prime example is the bZx line of hacks on the DeFi platform, the last of which occurred on September 14th. To steal funds, the attacker used a defective code and duplicated assets.
User errors
However, bugs in smart contracts are not the only obstacle to the development of the DeFi sector. Often, errors are made directly by service users. Millions of dollars have been lost due to user errors on DApps.
Local management
Another important issue is local governance and external regulation of assets. Chances are that the creator of the platform is under the control of a "higher" body. In addition, the government can issue regulations at any time that may restrict DeFi processes. As for the latter, the problem of the ban applies to the entire cryptocurrency market as a whole.
Other problems
Other common problems are related to the unpredictability of the market, the lack of the ability to insure risks, etc., due to which people can suffer financial losses without making mistakes.
To realize the full potential of DeFi, you need to figure out how to deal with them. It is true that DeFi has many benefits for the growth of the financial world, but it all depends on the vigilance and vigilance of the users themselves.
The future of DeFi
As for the current main problems of DeFi, at the moment the developers are working on fixing them, and most already have a solution. For example, projects like Atomic Swaps and pTokens are already working towards improving the DeFi sector.
Note that the aforementioned issues represent the main obstacles blocking the development of DeFi. And as previously mentioned, various types of solutions are already being developed to address the weaknesses of DeFi. Thanks to the effective use of bug bounty programs and the conduct of open source audits, problems associated with smart contracts and bugs will be much less common.
