Benefits and Challenges in the DeFi Ecosystem
As we have learned in the previous lessons, DeFi can enjoy the following advantages not found in existing financial systems by taking advantage of the characteristics of public chains.
- Freedom to develop financial services
- Free access to financial services
- Automation of financial services, making them more efficient.
In addition, the integration of smart contracts between DeFi projects is progressing well.
However, many challenges still remain.
Let's take a look at some of the challenges in the DeFi ecosystem to get a better understanding of the future of DeFi.
Risks of Smart Contracts
Smart contracts are developed using a specialized programming language called Solidity or Vyper.
Since each smart contract deals with a cryptocurrency such as ETH or DAI, there is a high possibility that bugs and vulnerabilities will remain there.
For this reason, it is normal to have the smart contract itself checked by a professional auditing project.
However, even so, the possibility of an unexpected incident (black swan) cannot be reduced to zero, and there have been cases of actual hacking.
DeFi is said to have a higher level of security than the existing financial system, but it is important to know how to respond to unforeseen circumstances.
Exchange of cryptocurrency for fiat currency
ETH and DAI are global cryptocurrencies, which in theory can be used by anyone with access to the Internet, regardless of region, age, or circumstances.
However, when it comes to actually obtaining them, it is not easy, especially in developing countries.
Even if you have a large amount of fiat currency in your country, you will need some way to exchange fiat currency for cryptocurrency.
Even if the DeFi ecosystem is sufficiently widespread, it is useless if there is no way to access cryptocurrency in the first place.
Integrating Off-Chain and DeFi
Most DeFi projects are still confined to public chain ecosystems.
However, in the future, the ecosystem will have to work with real estate, fiat values, and legal regulations to expand.
For example, DAI, a stablecoin project that uses smart contracts to represent the value of the U.S. dollar, needs to work on integrating with off-chain in various other ways.
Small and unsecured loans
While "lending and borrowing money" is one of the simplest financial services, both lending and borrowing in DeFi today can only be achieved in ways that require excessive collateral.
For example, if you want to borrow $100 worth of cryptocurrency, you need to offer $150 or $200 worth of cryptocurrency as collateral.
This is so that the collateral can be forcibly confiscated by a smart contract in case you fail to repay the loan.
However, it is unlikely that people who cannot afford to borrow fiat money from banks will have the collateral to borrow cryptocurrency from DeFi.
Therefore, a more flexible lending and borrowing system, including credit scores, is needed.
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Let's get a better understanding of DeFi's prospects
Because DeFi is a mixture of future expectations and challenges, it is important to discuss various issues from a flat perspective.
In addition, since it is a broad and deep field with many updates every day, it is very difficult for one person to learn everything.
However, DeFi was originally conceived as a keyword and concept to attract attention.
It's a movement to make its potential widely known to spark further discussion and bring in people to actually develop it.
A culture of warm hands and support is spreading to those who want to learn new things so that many projects can utilize smart contracts.
Once you understand the potential and challenges of DeFi, you can actively participate in the development, learning, and discussion of DeFi projects.
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