The decentralized finance (DeFi) sector is still young and going through a maturing process. Nonetheless, it has made a considerable impact on the economy. DeFi has altered the state of the conventional financial system and contributed to more extraordinary innovations in banking. This industry has skillfully adapted to current environments, fostered innovation, and embraced change.
Recently, we have been experiencing much volatility in the DeFi industry. However, the latest meltdown in the markets could be what is necessary for its future growth. Much like the dot-com bubble burst 20 years ago, a collapse in the tech sphere will eventually lead to a greater marketplace for all things DeFi and cryptocurrencies.
Will the DeFi ecosystem crumble, stay stagnant, or evolve in the future? Let’s look at how DeFi is improving.
1. Sophisticated Voting Models
The DeFi ecosystem has a simple governance method: one token, one vote. Industry experts believe it is time for a makeover to enhance DeFi governance models. The first is constructing token models that remove the economic interest from governance endeavours. The second is installing greater sophisticated voting models that are challenging to manipulate.
Indeed, there are methods De-Fi can employ:
- Quadratic Voting: Buy votes when the price of votes is a quadratic component of the number of votes acquired.
- PoP: Proof of participation is another integral aspect of DeFi governance. It will highlight trading histories without liquidations and contributions to various governance ideas.
- Limited Governance: In the end, limiting governance concepts to specific elements of a DeFi protocol can often be the best way to evolve the DeFi space.
2. On-Chain Liquidity
Liquidity pools are critical since the market participants inject their cryptocurrencies into liquidity pools. Then, they are rewarded with other tokens based on their share of the total pool liquidity. For a typical DeFi app, liquidity mining must do more to prevent runs and collapses.
3. Credit and Savings
For DeFi to adequately surpass the traditional banking system, the industry must adopt credit and savings products since this is essentially the basis of the finance sector. Some DeFi firms have already adopted these activities. Unfortunately, they have come face to face with federal regulators.
Still, it is a promising sign that the typical DeFi app or company brings traditional banking services to DeFi. Some recent developments include:
- Lines of credit
- Interest-free loans
- Savings products
- Debit cards
- Lending instruments with crypto-backed collateral
DeFi has been vulnerable to cyber attacks, like every other digital-related industry or technology. DeFi and the broader crypto sector need better security to prevent identity theft, data breaches, and cyber attacks that can wipe out an entire exchange. Despite many breakthroughs in this industry, DeFi sometimes gets an unfair reputation due to news headlines about its cyber vulnerabilities. However, these isolated incidents do not define the industry.
The DeFi platform is evolving to install better security apparatuses. Here are some precautions implemented:
- A re-entrancy attack, which happens when the infiltrator identifies an external contract before updating its own state.
- Experts say that it is important to avoid inserting things like “block.timestamp” or “blockhash” into a DeFi app since it will then be susceptible to exploitation.
- The DeFi ecosystem needs to avoid common glitches. The most prevalent one is when loops are enormous, which could make the smart contract useless when it reverts.
- It is essential to initiate an external audit of your entire code, along with verification techniques, before deploying any comprehensive action.
- Many DeFi coders are creating disaster recovery plans, including upgrade plans, instituting an emergency pause feature, and receiving insurance.
In addition, the DeFi public is also doing a better job of being vigilant. As investors become savvy, they are more aware of following the latest security protocols to protect their assets. Many DeFi companies have taken the responsibility of educating the public about cybersecurity, which will lead to a more intuitive user base.
5. Intense Volatility
Let’s be honest: DeFi and cryptocurrency have been highly volatile. It is this level of fluctuations that has prevented greater adoption. Until the volatility aspect subsides, it will be challenging for this space of the global economy to be approved with mainstream acceptance. Of course, this will be a true challenge, but the recent pullback could be what matures the sector.
6. Better Investment Strategies
The final step in DeFi’s evolutionary tale is to grow DeFi through better investment strategies that balance growth with risk appetite. Perhaps this is more of an individual component or industrywide trend. Nonetheless, DeFi needs a more sophisticated investment model to become genuinely competitive.
Here are some obvious changes that need to happen:
- Buy and Hold
- Lenders who offer tokens in a liquidity pool
- Decentralised money markets
- DeFi indexes (think the S&P 500 or the Dow Jones Industrial Average)