Series 2 — Existing Problems of DeFi Asset Management
Decentralized Finance (DeFi) is a new area of growth for crypto investments. We have discussed the next evolution of cryptocurrency technology in our Series 1.
In recent times, DeFi platforms in dollar terms have increased over 1000%. The DeFi industry reached more than $10 billion in value from $1 billion at the starting of 2020.
Many new DeFi projects are appearing and introducing new concepts & features. DeFi is undoubtedly an exciting place to be right now and poses many attractive opportunities for traders and investors.
But, the decentralized finance movement is still in its infancy, young and ambitious. This system is made up of many different actors and subsectors, some of which simply don’t exist in traditional finance.
The DeFi ecosystem is a field of technical experiments and innovation. Accessibility is global but yet hurdling in terms of poor user experience or UX, the anonymity of the founders, smart contract vulnerability, etc.
Let’s have a look at these problems of DeFi-
1. Poor User Experience
Currently, the use of DeFi applications requires additional efforts on the part of the user. A major weak point closely related to the technical implementation is the usability or user experience of DeFi protocols. The protocols are complicated and mostly designed for crypto-native users. The UX of DeFi products should be one of the top priorities for developers.
For these applications to be a key element of the global financial system, they must provide tangible benefits that will affect users’ desire to abandon the traditional system. Another thing, DeFi projects have struggled to gain traction beyond those that are inherently familiar with Ethereum.
Compared to today’s social media platforms or intuitive brokerage services, we should be hopeful that DeFi will overcome these UX challenges.
2. Anonymous Founders are Very Risky
Blockchain-based applications are open and transparent by default. Many of the developers are taking this opportunity! This is beneficial because anyone can inspect the project and confirm that things are working as they intended. Because the source code is public on the blockchain, it’s also simple for anyone to copy existing projects (“fork” the project), change a few things, and release a competing platform.
So, many of these DeFi projects are started by anonymous founders, which can be both good and bad. This enables anyone to contribute and own part of a new protocol, but also potentially enable bad actors to create malicious projects that exit scam by stealing all the funds through a hidden back-door!
Users of a popular decentralized exchange platform recently found that all the native tokens of that exchange are swapped for ETH. They are not aware of the team as it is completely anonymous! Later it was labeled as an exit scam. In this way, the users lost trust!
3. Community Governance is Challenging with Inexperienced Team
There is always a chance that a DeFi project can change who runs the platform or how it is operated, sometimes with little to no warning. That’s why the projects are introducing token-based governance.
Governance tokens are providing power to the users of a particular DeFi protocol and powering them to influence decisions concerning the core protocol, product or feature roadmap, hiring and staffing, and changes to governance parameters.
It is a very new construct and likely to come with many tradeoffs. Many users don’t consider both the internal governance of an asset as well as its external regulations. Technical implementations are also tough without having experienced developers. Lastly, it also requires rapid community formation to be successful.
3. Technical Issues
Smart contract vulnerabilities are always a risk of DeFi protocols and it is closely tied to another common problem is ‘User Error’. Even if developers think their code is airtight, they cannot anticipate the ways in which users will interact with their applications.
Millions of dollars have been lost due to users sending their funds to the wrong address, such as a DApp’s smart contract blockchain address. This is a problem that can often be rectified with new token standards such as ERC-777, which can detect and block these mistaken transactions, although raising the transaction costs.
Furthermore, most DeFi Apps currently rely on oracles, third-party services that send and verify real-world data and submit this information to smart contracts. So, we can not avoid the technical risks.
4. Other Problems
Decentralized projects are mostly operated without a license in most jurisdictions, regardless of where the end-user is based. With regard to taxation, the handling of DeFi assets is also not clearly outlined in most jurisdictions.
Even beyond the risks involved, certain issues persist that often affect the user experience of these platforms. These include over-collateralization, low liquidity, and very little interoperability between blockchains.
One of the most popular use cases in DeFi asset management today is Yield Farming or automated lending and borrowing. Lenders are generally players who hold a significant amount of assets and are looking for ways to earn interest on their holdings. By providing liquidity for an asset, long-term lenders are rewarded. This comes as a win-win by adding liquidity to an asset’s market while giving passive income to those providing it.
Within the DeFi craze, numerous yield farming projects were created, a majority of them by anonymous developers and these have a very poor user experience. While the anonymous aspect had no effect on some protocols, others were significantly damaged.
DAOventures are trying to solve this problem by bridging the gaps and trying to introduce an automated smart money manager for DeFi. It is a pooled asset manager and robo-advisor for decentralized finance. With technologists' core team from ex-Google, ex-Standard Chartered Bank, experienced Chief Data Officer and developers, DAOventures aims to accelerate the bridge to the future of finance with DeFi.