Users who have become accustomed to rapid access to digital goods and services are now focusing their attention on the banking industry. Why isn’t it possible to email nearly everyone globally and pay them money in the same way? Or even provide them with a loan? Such inquiries are at the heart of a brand-new field known as Decentralized Finance (DeFi). Blockchain is one of the primary technologies driving the global adoption of DeFi in the financial services sector.
Decentralized Finance (also known as DeFi) is a set of financial apps built on a blockchain network. One of the most distinguishing characteristics of DeFi applications is totally or partially decentralized. This is how, rather than relying on traditional intermediaries, businesses may provide dependable financial services on top of the transparent and secure blockchain network.
DeFi development means removing middlemen like payment service providers, banks, and investment funds from the mix. This translates to more efficient and cost-effective services such as transactions and loans.
The field of DeFi is undergoing rapid expansion. Various DeFi applications that offer lending and borrowing services, financial banking services such as issuance of stablecoins, tokenization services, exchange services, and other financial instruments such as derivatives and prediction markets have already deployed more than $2 billion around the world.
As a result, we can’t honestly state that DeFi is one thing sometimes. Let’s discuss here various challenges in the Defi development process.
Technical dangers
DeFi relies on the integrity of smart contracts and the blockchain protocols that underpin them. Thus any flaw in the code might result in significant losses for the app’s users. While writing error-free code is impossible, there are several tools available today to help developers improve the quality of their code.
Complicated Usability
The user experience of the protocols is another flaw strongly tied to the technical implementation of Decentralized Finance. They’re frequently confusing, convoluted, and tailored for bitcoin newbies. Even the best projects have a hard time breaking through to individuals who aren’t already familiar with them.
Centralization
Large teams or business houses venture into DeFi app development. Therefore, they aren’t entirely decentralized. Once found. However, these projects typically strive towards decentralized governance and decision-making. Because the intermediary has complete control over the assets, the counterparty risk exists as long as an application is semi-decentralized and funds are transiting through an intermediary who can freeze funds.
Liquidity
Liquidity is essential for efficient pricing in the financial business. Liquidity DeFi methods are now being surpassed by centralized alternatives that offer many low-cost liquidity providers. The liquidity risk is linked to technical concerns like scalability and congestion issues that the story and platform are experiencing. The Ethereum network may become so congested during a crisis that liquidity providers may not keep pricing consistent among sellers. Individual exchanges will see massive dislocation. As a result, they are resulting in uncertainty and market losses.
Regulation
In most jurisdictions, decentralized initiatives are currently operating without a license. Regulators frequently do not explicitly explain how DeFi should be handled regarding taxation. DeFi activity now accounts for about 1% of overall bitcoin market activity. However, policymakers must consider best protecting it with the appropriate restrictions as it gains traction.
Unified Global Framework
Even though DeFi projects worldwide get developed on similar platforms and technology, each country has its financial setup and laws, which sometimes hamper the growth of DeFi’s interoperability and cross-border trading volumes. Governments and regulatory bodies try to control the DeFi environment for cross-border trading. A unified and universally accepted Defi solution is still a challenge since few countries have banned crypto-based trading and investment solutions or put them under an authoritative environment. These measures do not allow DeFi to realize its full potentials.
Transaction Processing Speed
Decentralized platforms can be slower than centralized platforms at times. According to research, centralized cryptocurrency exchanges execute orders on an average of 10 milliseconds, while decentralized exchanges take at least 15 seconds. A charge on a decentralized exchange could take up to one minute to fulfill, substantially longer than on a centralized exchange.
Low liquidity and difficulty transitioning between blockchains are two issues that make current DeFi systems slow or unreliable. With so many different currencies and tokens being traded, the number of traders accessible is insufficient to move assets smoothly. When you combine this with the limited ability to transfer between different commodities traded on exchanges, you get a congested system.
A generation already waiting for the upcoming 5G internet boom may have certain reservations in accepting low processing speed to obtain a fully secure trading experience.
DeFi is only going to become more prevalent in the IT world. The undeniable benefit of DeFi is that it is based on a set of protocols implemented by many projects. This allows them to communicate with one another. For example, you can use an exchange and a lender from two unrelated projects, but you get a derivative quickly when you combine them.
At Antier Solutions, we offer mission-driven DeFi app development services to help our clients penetrate the DeFi market with world-class dApps. Whether you need a decentralized exchange, a borrowing/lending platform, or any other DeFi app, we effectively cater to your requirements with our diligently-crafted services.
Please fill out the form to make the request. We’ll be in touch to schedule a free demo.
