As mentioned in the last article, at present, open finance (decentralized financial DeFi) still has the following pain points that need to be resolved.
- How to realize the exchange of cross-chain assets
- Decentralized storage
- How to break through the performance bottleneck of TPS
- At present, the DeFi platform is too simplistic, and it is easy to cause congestion
- The technological breakthrough of Layer 1 & Layer 2 in the public chain technology
- Contract security testing and audit
- How to ensure the safe and reliable storage of Crypto assets and avoid becoming a paradise for hackers
- How DeFi is incorporated into the supervision of various countries to avoid becoming a hotbed of money laundering and terrorist activities,
- The continued development of Crypto assets poses regulatory challenges and tax base erosion issues for various countries
However, as a developer, when we look at the general development experience of things, the author believes that in the future, some technical bottlenecks will be gradually resolved. On the contrary, some non-technical problems may become the biggest challenge of open finance, and also the business opportunities.
Here, the author is willing to throw a brick and draw on the jade and put forward five major challenges in the future development of DeFi that I think:
Challenge 1. Open finance chases high yields
At present, open finance (DeFi) is still in the preliminary stage, but some forms and problems have been initially reflected. The most important thing is that most of the current open finance products are the following two
- DEX (Decentralized Transaction)
- Lend & Borrow (loan)
For the DEX track, because of the high homogeneity similar to CEX, the core of the competition is reflected in the handling fee and fuel cost.
For the Lend & Borrow track, it is fully reflected in everyone’s pursuit of high yields.
Just like the experience of a centralized exchange (CEX), it must be in a market that is close to homogeneity and at the same time close to perfect competition (in theory, as long as there is a network in the world, you can participate in DEX without KYC) It is foreseeable that the future competition will surely fall into the same process as centralized finance, enter a competition to chase high yields, and at the same time, resources will continue to lean towards superior projects.
Furthermore, due to its own weaknesses in human nature (corruption + risk-taking tendency), such a tendency to chase high yields will also lead to a second serious problem and a major challenge.
Challenge 2: Bad money drives out good money
According to the above, due to the weakness of human nature itself, the tendency to chase high yields will inevitably trigger the next major challenge. In this process, there will be a process of bad money expelling good money.
Because of human nature’s greedy interests and risky impulse weaknesses, the tendency to chase high yields will inevitably lead to two predictable trends
- Resources are leaning towards the superior DeFi project
- Bad money DeFi will expel good money DeFi projects
In Challenge 1, we discussed the inclination of resources towards the superior DeFi project, while in Challenge 2 there is also the tendency of bad coins to expel good coins.
- Challenges & business opportunities
At present, there are few credible projects that can objectively evaluate the DeFi project. I believe that if the market develops, if there are some StartUp teams to solve this important DeFi challenge, it will get better development. opportunity.
Challenge 3: High relevance of open financial products
One problem with open finance is the high correlation between various products. for instance
- DAI is highly dependent on the Crypto assets mortgaged in MakerDAO
- Compound (loan) & DyDx (DEX) are also dependent on the stablecoin DAI
- For the decentralized aggregation platform 1inch, it relies on Compound & DyDx
Such interdependence, and the respective market value is relatively high, when the industry is in the rising period, there is no too serious problem, because as long as the inflow of active liquidity, all problems will be covered.
However, once the same liquidity shortage as the centralized exchange (CEX) occurs, such a high valuation and high dependency at this time will trigger a series of domino effects. In fact, a large part of the BTC’s plunge in 2020/3/12 is related to MakerDAO.
- Challenges & business opportunities
The author believes that if there are some ToB companies, they can build a firewall between various DeFi products in a decentralized or centralized manner to avoid systemic risks. This is beneficial to the entire industry. However, such a business is best performed by the de facto leader in the DeFi industry, and such resistance is minimal.
Challenge 4: Security issues
As mentioned earlier, the author believes that, whether it is a centralized exchange or a decentralized financial product, security issues are always an unavoidable problem. As the value of Crypto assets is accepted by more and more people. Security issues have increasingly become an area of serious concern.
For open finance, its security issues are mainly concentrated in a few aspects
- Digital asset custody
- Contract security
- Network, wallet, and environmental security issues
- Digital asset custody
Among the security issues, the author believes that it is still the security issue of the Crypto assets hosted in the capital pool of open finance. Whether it is a frequent hacking incident, or a guard’s theft when bad coins evict good coins. The DeFi project currently has relatively few services dedicated to Crypto asset custody. The rapid development of the market and the fierce market competition have also prevented DeFi leaders from prioritizing the security of assets. Once a serious incident like Mentougou occurs It will inevitably cause serious crisis and mistrust to the project party or the entire DeFi market.
2. Contract security testing and audit
In general, the development of smart contracts and DeFi is still in the early stages, so there are not too many companies and entities with strong technical capabilities in security testing and auditing in this regard. With the continuous expansion of the market size and the continuous update of demand, the need for security testing and auditing in this area will become stronger and stronger.
3. Security issues of network, wallet and environment
Just as Alipay will test the entire payment environment, for DeFi applications, sometimes the security issue is not the contract or the DeFi project, but the user’s computer or mobile phone is in an unsafe environment. Due to the characteristics of decentralized finance, once a similar security breach occurs, users will have no way to recover the lost assets. Therefore, the integrated security monitoring of wallets, networks and the environment is a core requirement for the continuous prosperity and development of open finance.
Challenge 5: Compliance and regulatory issues
For the development of open finance, an unavoidable issue remains compliance and regulatory issues. As mentioned earlier, for centralized exchanges (CEX), one of the future trends is to gradually comply with regulations and be included in supervision. In order to avoid CEX becoming a hotbed of terrorist activities and money laundering.
As for decentralized finance, they also face similar problems, and until now, in the face of this continuously developing market, there have been few unified policies. For DEX, how to integrate compliance and regulatory issues without compromising the open principles of open finance is a relatively new topic. Blindly suppressing may not be the best way, because open finance is a global economic behavior with extremely low transaction costs, which is difficult to completely eliminate. Being fully included in the scope of the alliance chain is also contrary to the open word of open finance.
Therefore, how to find a suitable road is a major challenge for the stable and sustainable development of the DeFi track.
about the author:
Chen Lin, the founder of Echain Technology, an explorer and evangelist in the field of blockchain. More than ten years of experience in Internet product development and operation of Fortune 500 companies. He once served as a core technology expert at Infosys and Microsoft headquarters in the United States and was responsible for product development. He was rated as one of the most influential CEOs in the Asian area of blockchain by “Tech in Asia”. Senior writer of Ethereum Chinese Network, Quantum Chinese Network and Blockchain School. Founder of “Blockchain School” and founder of “Digital Economic Life” concept project.
Author contact email: [email protected]
Introduction of Yichain Technology : Yichain is a blockchain company focusing on blockchain technology. Member of the Shanghai Blockchain Technology Association, currently the main technical products provided are the following three:
- Provide consulting services for blockchain industry/cognition/products/technology/solutions
- Smart contract training content (currently includes four platforms: Ethereum, Libra, Hyperledger and Ant Open Alliance Chain)
- Contract security testing and code review services