Main risks and problems of DeFi sector and how to mitigate them
Tags: Depco, Risks, Decentralized Finance, Defi

Main risks and problems of DeFi sector and how to mitigate them DEPCO Jun 15, 2020·4 min read

Decentralized Finance is a growing sector that captures the attention of not only cryptocurrency supporters, but also it is getting more and more attention of the whole financial sector. This is especially due to its huge future potential, which, if achieved, can be revolutionary to the financial sector as it is now. However, until that time comes, there is certain number of crucial problems that the sector has to address in to order to be able to fulfill its potential.

Not as decentralized as it should be

While many projects are truly decentralized, others only seem to be decentralized, but are not even close to achieving this standard. This is especially problematic in the beginning phases of the projects, where developers can have excessive power leading to centralization of the projects. Even though, some see this as a necessity for fixing the bugs and creating efficient and working code, the fact is that teams can be given way too much control over the project. This can often lead to misuse of the consumer funds, which in fully decentralized finance should not be possible.

Obviously, this is not the case for each project, however, there have already been projects, where the teams took all the funds of the investors and disappeared. If number of these cases should rise in the future, the potential of the sector could be in jeopardy.

User error

For cryptocurrency industry as well as for the sector of decentralized finance, the main goal seems to be disconnecting from the financial world as it is now and creating a new and better alternative. The crucial difference should be leaving out the middle man, which essentially gives much more power over the finances into the hands of individuals.

Bearing this in mind, with great power comes great responsibility. It might sound foolish at first, but being in charge of own finances means that individuals have to take it seriously. Sent money to the wrong address? In traditional finance this would not be a problem and could be easily solved by two maybe three calls and emails to your bank. However, this is not the case for decentralized finance, where once the transaction is sent to the wrong address, it can hardly be recovered.

This cannot be prevented by the work of developers, who even if creating code without any bugs, cannot completely change the way the users will interact with their platform. Already millions of dollars have been lost due to the simple mistake of being sent to the wrong addresses. There might be some way out of this. The new token standards such as ERC-777 can help with limitating this by detecting and blocking these transactions, however, they are usually more expensive.

Overcollaterization

At present, DeFi sector also suffers from overcollaterization, which is by far one of the biggest problems. Lenders want excessively large amounts of collateral to be put up for their loans mainly due to the fact that the market is currently really volatile. Many lenders would therefore refuse to work with a borrower, unless they can effectively front a significant amount of assets in the first place. This, however, undermines the essential function of borrowing and possess a threat to the whole idea of banking the unbanked, which should be one of the main goals of DeFi. Moreover, it can cut profits from leverage trading, discouraging the use case as well.

Bright future ahead

Therefore, even though the sector definitely has a lot of place for improvement and mitigation of risks, there are already companies established in the market that are here to help anyone, who wants to be a part of it. Having in mind many risks of the sector, one must not be afraid to get into the sector of DeFi. It is still one of the most promising and growing sectors as well as it offers great profit making opportunities.

DEPCO offers services for anyone, who wants to mitigate the risks connected to DeFi sector such as DEPCO Academy, where anyone can get educated about the sector. Moreover, to protect investors from pitfalls of this young and ever-growing industry, DEPCO offers different possibilities of how anyone can invest under the supervision of experienced traders.

Moreover, combination of experienced traders and skilful software engineers and mathematicians within DEPCO team made it possible to create two systems — Keeper and Explorer system, which are here to help anyone profit from the market volatility and different arbitrage opportunities.