The Virtues, Trials and Perils Facing the DeFi Industry: Will it Go Mainstream?

A term that was introduced to the world in 2018, Decentralized Finance (DeFi) has expanded the possibilities of blockchain technology and cryptocurrencies by leveraging the “smart contracts” capability provided by the Ethereum blockchain network.

Reimagining traditional finance that employs a network of banks, central institutions and various intermediaries, DeFi was touted as a revolutionary financial system that is transparent, borderless and empowers users to transact directly without intermediaries using cryptocurrencies.

However, despite the vast number of benefits offered by DeFi, it presents a unique set of challenges and threats that continues to divide financial experts on the future of this rapidly proliferating decentralized global financial system today.

The virtues of DeFi

Imagine a financial system where control of funds and confidentiality of transactions are the sole mandate of the user.

DeFi has accomplished this by using smart contracts to execute transactions between users, facilitate borrowing or lending, and using cryptocurrencies to power transactions across the globe at a blistering pace.

Despite eliminating the need for central banks to regulate all of this activity, DeFi offers maximum security through an immutable transaction capability offered by blockchain technology.

In other words, DeFi eliminates the shortcomings of traditional finance while introducing crypto users to a new world of possibilities using cryptocurrencies for transactions.

Moreover, by relying on the very community of users to decide on the governance issues of the various DeFi projects existing today, it democratizes finance, allowing everyone to participate in the global economy via the Internet.

The challenges plaguing the DeFi industry

As with any new technological innovation, DeFi has also faced challenges that can destabilize its global expansion.

With thousands of blockchain projects jostling for users and market share in a rapidly expanding DeFi space, cases of bad players embezzling investors’ money and running away with it are on the rise.

Moreover, since all transactions are conducted over the Internet, cybercriminals focus on projects that may have flaws in their codes and continue to target users who are not as careful with their crypto assets.

According to blockchain analytics firm Chainalysis, these malicious entities were able to steal a record $14 billion in 2021, with a large portion of those funds stolen from DeFi projects or their users.

In response, however, the DeFi industry and the broader crypto community are constantly innovating new methods to reduce the vulnerability of smart contracts and adopting a self-regulatory framework designed to prevent such attacks, thereby increasing investor confidence in this. revolutionary financial system.

Also Read: This Analyst Believes Bitcoin and Ethereum Will Soon Hit an All-Time High: Here’s Why

The threat of debilitating regulations

Unsurprisingly, the rise of DeFi continues to baffle governments around the world due to a combination of the challenges mentioned above and the threat they pose to the current established global financial order.

To understand this latter context a little better, just look at what the Federal Reserve did at the start of the COVID-19 pandemic.

The central bank began printing trillions of dollars to buy corporate bonds and keep global interest rates at multi-year lows, ostensibly to prop up the US economy.

However, this has fueled runaway inflation and as a result, the economy is now facing an impending recession.

In comparison, DeFi operates without any oversight from the Fed or any other central bank and therefore provides people with a level of non-interference that can let market forces determine the course of the global economy.

It puts crypto holders in charge of determining the proposed APYs and applicable borrowing interest rates, rather than being subject to abrupt changes in interest rates as central banks around the world do.

However, with most developing countries worried about the transfer of value from traditional financial systems to DeFi, a number of debilitating regulations are planned that threaten to cripple the burgeoning DeFi space.

Although the maintained narrative indicates that these regulations are intended to protect the interests of investors, a closer look at the proposed draft regulations lays bare the underlying impact of reducing or restricting innovation in the industry. DeFi space.

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