According to recent figures, the total value locked (TVL) of Decentralized Finance (DeFi) reached over $100 million in November 2021 and now it has sealed more than $39.5 billion. The past few years have transformed the finance sector by including high-end technologies streamlining business functions and processes. DeFi DApp development is one of the major use cases for the industry that eliminates intermediaries and reduces transaction costs.
Whether it be loans, investments, trading, or transactional processes, DeFi streamlines every function with enhanced transparency, security, and speed. Besides the multi-million dollar DeFi market, when it comes to developing DeFi DApps solutions, there are some pitfalls developers and businesses face.
In this article, we’ll look into some challenges of DeFi DApp solutions to help you acknowledge the difficulties while diving into the domain. Before that, let’s see what exactly is DeFi DApps.
What is DeFi DApps?
Decentralized finance (DeFi) acts as a revolutionizing technology that replaces traditional financial systems with automated finance infrastructure that does not involve any intermediary or central authority. Decentralized applications (DApps) in the context of DeFi serve the purpose of permissionless, trustless, transparent, and immutable blockchain infrastructure to manage financial operations.
6 Top Challenges Faced by DeFi Projects
No doubt DeFi is revolutionary but it has some limitations. Let’s have a look.
1. Lack of Regulatory Compliance
As we know DeFi is a decentralized entity that is not controlled by any central bank, authority, or third party. It operates independently that imposes certain regulatory requirements. Due to financial crimes such as money laundering and terrorist financing, traditional banking systems are highly regulated. Whereas, in a centralized financial system, transaction processes are keenly monitored and any fraudulent transaction immediately blocks the sender and receiver accounts. There is no such protection in the DeFi system.
2. Vulnerabilities – Hacks & Threats
Blockchain is an immutable ledger which means it is hard to make any changes in the records. However, some components of DeFi are prone to hacking that can ultimately result in loss of funds and data breaches. According to the report by the REKT database of cyber-attacks, DeFi protocols are vulnerable and responsible for the loss of over $4.75 billion due to fraudulent transactions, exploits, and hacks. Among these, the most popular type of cyberattack is a honeypot.
Considering the higher security exploits, weak DeFi protocols are also responsible for the reputational damage to entrepreneurs and businessmen.
3. Scalability & Performance
DeFi DApps solution inherits two major benefits: transparency and security. However, one of its major drawbacks is inefficient performance. When compared to centralized financial systems, DeFi solutions turn out to have slow transaction speeds as well as scalability issues. As a result, processes take too much time and ultimately affect the overall performance of the network.
4. Lack of Field Experts
DeFi companies and projects face challenges when it comes to hiring developers and professionals in this field. For InvoBlox DeFi DApp development services, companies look for both blockchain and non-blockchain experts who have knowledge of the finance workflow as well as suitable technologies that could work well with proposed solutions. One reason for the lack of competent resources is that the crypto world is growing at a faster pace and the developers are keeping themselves in the race of learning and implementing new technologies, their feasibility, and drawbacks for decentralized finance projects.
5. High Transaction Fees & Low liquidity
In the cryptocurrency world, liquidity refers to the degree to which a digital asset can be bought or sold. For instance, the Ethereum DApp development market is already full of several different types of digital assets and it becomes difficult for users to choose a particular currency when its value changes continuously. Low liquidity means that the volatility of the market is causing an increase in cryptocurrency prices and assets are lacking.
Consequently, low liquidity leads to high transaction costs especially when certain cryptocurrency is not supported or available and the only option left is to pay a high fee to sell or buy digital assets. As a result, users are not able to exchange their assets which ultimately affects the efficiency of financial systems.
6. Limitations in Smart Contracts
As discussed above, smart contracts fulfill the ultimate functions and responsibilities of intermediaries in the DeFi DApps. Therefore, it is critically important for smart contracts to be error-free. Smart contracts must employ a secure and efficient code design to make it difficult for hackers to exploit the ecosystem. Flaws in the code structure can lead to loss of funds and misuse of the processes such as stealing tokens, deleting wallets, removing users, etc. Some other issues include
- Poor smart contract performance
- Misspent payment
- Operational issues
Moreover, as we know DeFi services replace intermediaries and offer full responsibility to users for managing their funds and digital assets. Due to a lack of tools and techniques, DeFi solutions are prone to human errors that ultimately lose the potential of using DeFi apps.
Some other challenges of DeFi DApps include:
- DeFi protocols are prone to cyberattacks. Due to code vulnerabilities, the system can be hacked which makes it possible for hackers to exploit the system to defraud the users
- Sometimes even valuable DeFi coins face volatility and unexpected changes can lead to severe losses for the buyers and sellers of DeFi platforms
Designing and developing a DeFi DApp is a truly challenging task. Strict yet unclear regulatory obligations and complicated technological frameworks introduce possible drawbacks in decentralized finance projects. However, over time, these vulnerabilities are actively addressed by DApps development companies. They are hiring and training the DApps developer for the finance industry so that challenges could be mitigated and scalable systems could be developed.