In short, decentralized financing promises transparency and provides favorable terms for borrowers. DeFi platforms should create an alternative financial system for disbursement / receipt of loans, exchange of currency, payment, etc. There are no banks, intermediaries or reliable third parties, no governments are involved, and finally the infamous intermediaries are eliminated. It is just a secure and transparent program.
DeFi allows borrowers to get trouble-free loans: you do not have to worry about opening a bank account, long order checks or paperwork. For holders of cryptocurrencies, DeFi provides the opportunity to lend their assets to other users, and thus achieve a profit of approximately 20%. Decentralized exchanges often act as managers of funds, thus eliminating this annoying middleman again. This is how DeFi should work, and maybe one day. What follows is the real current situation.
What’s wrong with DeFi in its current state?
Decentralization is a very profitable word. His philosophy is quite romantic, or frankly utopian: a world without a system and vertical rules imposed by old governments, organizations and banks. Everything is run by a community of enthusiastic enthusiasts. Nothing wrong with that.
The problem is that this kind of thinking can lead to chaos, which many see as a desirable backdrop for the “new world” – but not when it comes to personal finances and savings. Here we still long for some discipline and some rules of the game.
That’s when the difficult part of DeFi comes in: ignoring the rules and knowing your customers / anti-money laundering measures. This leads to a high risk of money laundering through liquidity pools. And make no mistake, the US Securities and Exchange Commission will soon notice such activity. There are many DeFi projects screaming about a bubble, but it is very difficult for regular users to fight this scam. Therefore, large sums can be wasted.
Why I believe in DeFi and what I learned
We do not believe in DeFi as we do today. In the beginning, when we were a peer-to-peer platform, things looked different. But we quickly realized that expectations for the current version of DeFi were unclear. Only central lending platforms have a promising future, and they have already proven to be reliable. It provides more functionality and speed, is easier to understand and use, and interest rates are set for borrowers, and lenders can get fixed interest rates on their deposits.
DeFi operates in a highly volatile and unpredictable market. It is not easy to use, despite all the complaints we hear all the time. Smart contracts, self-managed cryptocurrency wallets – how familiar are regular users with these terms? I do not even need to mention the number of flaws and errors with decentralized platforms.
What is happening now is a perfect example of the good old trick – the propaganda machine “extreme strength”. There is a lot of bouncing and unfounded praise, but if you scratch a little on the surface, you can see that only up to 30% of the assets run inside the DeFi. Projects other than DeFi or centralized financing account for up to 80% of fixed assets. Some kind of difference, right?
But to be more precise, the transaction fees are ridiculous, and in themselves they negate almost all the current benefits of DeFi. The cost of performing a DeFi operation can be as low as $ 100. This only makes sense if you are playing with insanely large sums of money.
Why is this happening? Well, that’s how boom or hype works! DeFi recently exploded and overloaded the Ethereum network. Consequently, transaction costs have exceeded the limit, and what he claims is available to everyone is suddenly not there!
Top risk for those who currently communicate with DeFi platforms
The main risk is the weakness of the smart contract. A “deficiency” can lead to a ban on all assets or even loss of funds. There are many examples, from DAO to the latest hacking of DeFi platforms. In the latter case, Oracle, which controls prices, is responsible for fraud and withdrawal of money from smart contracts.
Another risk is inevitably human error. Developers may claim that their code is indomitable, but they have no control over how each user interacts with applications and platforms. We have all heard stories of lost money due to wrong address.
The market is still largely unpredictable and investor insurance is virtually non-existent. Therefore, the risk of losing a lot of money is very high.