What DeFi needs to leap into the mainstream

DeFi is still the Wild West of cryptocurrencies – it’s confusing and complicated. Even losing funds is seen as a kind of rite of passage for traders who face scams, rug pulls, and the risk of lost or mistyped private keys. Despite this, recent data has revealed that the number of DeFi users on Ethereum hit a new all-time high of over four million.

With a variety of significant potential benefits for those that may have been uncatered for by traditional financial products, it’s not difficult to understand why so many are willing to accept the risks that seem so intrinsic to the DeFi world.

With adoption rising, it is only right to question whether more can be done to mitigate these risks. Can we make DeFi more accessible for those that aren’t especially tech-savvy or seasoned investors? I’d say we can and we must.

Finding the middle ground

Overall losses caused by DeFi exploits in 2021 totalled a staggering $12 billion. Most industry participants will have lost private keys and not been able to access funds, lost funds through mistyped keys or even given their private keys to the wrong people.

Mistakes in setting up transactions are costly, too easy to make and often irreversible. It’s an unforgiving environment even for experienced traders, let alone new investors.

We need to find a middle ground here, allowing independent investors to still benefit from all the positives of DeFi: such as high liquidity and being able to stake crypto assets and easily transfer funds without exposing themselves to such excessive risk. Industry providers can and should play a part here.

By helping users securely store private keys, continually operating with maximum transparency and simplicity, and providing the necessary support for all investors, the industry can do huge amounts to build trust and mitigate fears around DeFi.

Regulation is rapidly on the rise

Whilst DeFi is still in its infancy, with such significant growth and risk potential, it’s no wonder that government bodies and regulators are moving rapidly to offer better guidance for investors. The UK is one of the key players at the forefront of this movement.

The Bank of England has repeatedly called for better legal and regulatory frameworks to deal with the quickly evolving crypto market, including DeFi, over the past couple of years. It regularly urges global authorities to increase oversight of the cryptocurrency sector to prevent it from becoming a risk to financial stability.

Even the Advertising Standards Authority began to take against crypto misinformation in 2021, banning several ads from well-known brands they considered misleading or absent of adequate warning regarding potential risk.

What would more regulation look like?
Some experts have considered the impact it might have on the anonymity and privacy of its investors, particularly if new regulations were to require more formal identification in contracts. Could this negate one of the founding principles of blockchain-based technologies: anonymity?

So much is yet to be decided, but the key to success here will be the willingness and proactivity of government bodies and regulators to work together with those that understand the nuances of the DeFi universe best.

What is clear is that without any new regulation in place, DeFi could potentially be considered too high risk to go mainstream.  

Education is paramount for widescale adoption

The most important factor in widescale adoption of DeFi lies in education. With the crypto industry making the headlines almost every day with news of yet another scam resulting in significant unrecoverable losses, it is no surprise that 71% of Brits still say they have no intention of ever buying any cryptocurrency at all.

With this in mind, it is no wonder that DeFi is still largely monopolised by a millennial, internet-age demographic and heavy-weight institutional investors. Shouldn’t it be that DeFi is accessible and beneficial for everyone? If more guidance isn’t offered to enable safe and secure trading, DeFi risks falling into the same trap as traditional finance mechanisms – with only a tiny portion of the population reaping the benefits.

Again, this shouldn’t just be the responsibility of government officials. Key industry players can also support investors with more thorough and up-to-date advice on the latest advancements in DeFi and user-friendly information on how to avoid falling victim to scams and rug pulls. 

DeFi is the future, but if platforms don’t prioritise consumer protection and ease of use, it will never evolve beyond the realms of IT experts and large financial institutions. For the space to mature, we need to find a third way, where regardless of whether you’re on- or off-chain, you can buy and sell crypto in the same way as you would use a traditional bank account, with a username and a password.