Decentralized finance (DeFi) aims to provide global access to financial services through blockchain networks by removing intermediaries, reducing transaction fees, and offering opportunities for higher returns. However, DeFi faces significant obstacles to mainstream adoption, primarily due to a lack of accessibility and understanding.
Challenges in DeFi Adoption
DeFi’s user numbers peaked at 7.5 million in 2021 but dropped significantly the following year. The total value locked (TVL) in DeFi protocols also fell from $175 billion at the end of 2021 to $50 billion by November 2023. The complex nature of DeFi, including concepts like self-custody of assets and seed phrases, has deterred many potential users.
Adam Simmons, CMO of Layer-1 network Radix, highlighted these challenges, noting that the idea of self-custody can be intimidating. Losing a seed phrase could result in losing all assets, making it a significant barrier for consumers. In 2023 alone, the DeFi industry saw losses of approximately $1.95 billion due to security breaches and fraudulent activities.
Solving DeFi Challenges Through Transparency
To address these issues, blockchain projects like Radix are working on making DeFi more user-friendly. Radix has introduced features like “transaction manifests and transaction review,” which allow users to see which assets are being moved in their accounts. This transparency helps users understand and trust their transactions better.
Radix also tackles the issue of fluctuating crypto prices with a feature called “guarantees,” ensuring that users receive the expected amounts in transactions. For example, if a user sets a custom guarantee, the transaction will only proceed if the conditions are met, otherwise, it will be rejected.
Democratizing Liquidity Access
In traditional finance (TradFi), liquidity refers to how easily an asset can be converted into cash without affecting its market value. In DeFi, it means how easily tokens can be traded on decentralized exchanges. Tim Wang, COO of Elixir, explained that their platform aims to improve liquidity efficiency by integrating into wallets and consumer applications, ultimately routing liquidity to the highest-yielding pairs across all exchanges.
Layer-2 Solutions for Bitcoin DeFi
Bitcoin DeFi is gaining traction with the development of Bitcoin layer-2 (L2) networks. Rena Shah, COO of TrustMachines, emphasized the potential of Bitcoin DeFi, noting that Bitcoin holds a significant value that can be unlocked through decentralized finance. Although Bitcoin lacks a virtual machine or smart contracts platform, L2 solutions can increase its functionality and scalability without altering its core principles.
Future of Consumer DeFi
While DeFi adoption faces numerous challenges, gradual consumer acceptance is expected. Adam Simmons pointed out that technical innovations are crucial, but regulatory frameworks will also play a significant role. As these frameworks evolve, they will help shape how DeFi platforms operate and how users engage with them.
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