What are the Major Issues with Defi (Decentralized Finance)?

Before we all pay focus to the world of crypto and decentralized finance, the antecedent notion related to the typical financial sector amounts to $4.85 trillion (about $15,000 per person in the US). In the financial sector alone, there are more than 539,447 private establishments at play that constitutes banks, private equity financing firms, leasing companies, and insurance companies. With this supply of money in circulation and that too at the global level, we cannot bat an eye at the emerging defi sector. Although the figures and the numbers are impressive, if we make a stark contrast with the overall global market figure of $4.85 trillion, we cannot ignore the growth of blockchain, cryptocurrencies, and decentralized finance. 

The financial sector took almost 150 years to flourish and set its mark, but the momentum of DeFi is significantly high as compared to the latter. Although the DeFi sector is not that large, we need to acknowledge the fact that it is in its protractive stages and has more cushion to grow while relying on blockchain as its primal base and source. The consensus lies with the community and since communities are growing rapidly, and they place their interest in the sector, we see more avid and bright chances for the growth of decentralized finance in the future. 

The DeFi market is currently standing at a $77 billion figure that in comparison counts as a drop in the bucket. But what counts as impediments to this industry are some obstacles that act as roadblocks to further expansion. To surmount the major issues with decentralized finance we need to see the major problems that surround the DeFi sector and how we can cope with them. If we want to see the communities empowered with money in the hands of the people and without much scrutiny and checkpoints too, there is a need to probe into the problem linked to the DeFi and then provide a cohort panacea for the financial issues.

The Obstacles of DeFi

As we laid the hypothetical premises of a bank less society, we put the Decentralized system of finance here. What constitutes the significant issues for DeFi are the absence of central authority and lack of consumer protection as well as lack of regulation. Though decentralized finance seems like a remedy there is a major point of deflection here that plays a strong role. The core technology is the presence of a distributed ledger system, which makes it transparent, and easily accessible to anyone at any point in time. 

Since the transactions are carried out in infinitesimal seconds and the flow of monetary transactions is building up a strong structure of the database, the technology, and transparency of the system work best when the community or the buyers and sellers are completely trusting the ecosystem. At the heart of distributed ledger and blockchain technology lies the cryptocurrencies that are traded because of mining. Mining is the creating of new coins or tokens by consensus or validating from all the blocks in the chain that carry the same set of ledger transactions. 

As verification and consensus go parallel, the process of mining also works simultaneously, by solving complex mathematical problems. When solutions are achieved, and transactions are validated by all blocks in the chain the miner is rewarded with a coin also known as Bitcoin or any other altcoin. In the typical financial sector, the banks and the financial institutions act as intermediaries while their ledgers are not transparent and controlled as well as shared with the central authorities. 

Banks not only keep your money, and assets in check and offer a meager sum of interest while lending your money at the lucrative sum of interest to the public and businesses but also charge a certain fee for each transaction. Imagine your assets being monitored and lent and you can be ripped off your assets if the government runs financial checks and regular audits on the banks and their activities. Since all this is done and has happened in the past, the consumers are safer with the decentralized finance ecosystem. 

To make matters more apprehensible, the decentralized finance system is also charging no hidden fees and takes almost no time to transfer bigger sums of money. But some financial gurus and mandarins claim about a lack of consumer safety and an unregulated system is the main problem related to decentralized finance (DeFi). Having the absence of consumer protection and safety, there are more chances of fake projects coming in and taking huge investments from the public. While due to decentralization, there are more chances of money laundering, criminal activities, or some new pyramid scheme or a Ponzi scheme.

How to Even the Odds for DeFi

The arena for decentralized finance is yet achievable but the playing field is not yet ready to stay things as floated and buoyant. DeFi is built on a permissionless and peer-to-peer system. To safeguard the system and incorporate DeFi is a wise man’s approach as we would be able to empower the average person. And when individuals’ needs are met, they commonly share the same economic establishment goal of improvement and betterment. As with DeFi it is quite difficult to levy taxes. 

However, a system can be built to relate any individual’s wallet with their legal documents and a record can be maintained about how much an individual is transferring and accepting to other wallet holders. With this methodology, one can ascertain a certain tax slab for them. Though the process is slightly under authorities’ control, making it partially centralized. DeFi and conventional finance are parts of the same cogwheel that keeps the flow of money in circulation and the needs of the industries met. The right approach is to model solutions for the DeFi world. We have all migrated to the digital movement, and therefore it would be a penny-wise and pound-foolish approach to not adopt the most adopted financial digital movement of this era.