During this first wave of decentralized finance projects and services, users have been more than willing to part with their funds. It is very similar to how decentralized exchanges work, as convenience seems to trump privacy and security in DeFi. Just because some platforms offer a high annual percentage yield does not mean anyone should give up control of their funds.
Considering that DeFi is designed to be built on blockchain technology, there is no reason for go-betweens, intermediaries or fees. Unfortunately, these aspects are all present in a lot of solutions today. Regrettably, users have to pay to deposit funds and withdraw them again afterward. Concepts like these will eventually be the downfall for DeFi unless developers address them soon.
Uniswap, currently the fourth-largest Ethereum DeFi project by total value locked, shows how noncustodial DeFi works. The DEX never takes control of user funds — not even when adding liquidity to trading pairs. Its downside is that the escalating Ethereum gas fees hamper it. Using Uniswap is very easy, but paying over $20 to move funds in and out is unacceptable.
Ultimately, the end goal of DeFi is to let crypto enthusiasts earn a passive revenue stream without contracts or platforms taking custody of funds. Several projects already explore that option, but there is room for further improvements.
Why DeFi needs peer-to-peer solutions
In the current landscape, interfacing with decentralized finance relies on trusting smart contracts that may need an external audit. Unfortunately, this has given rise to a growing number of scams, rug pulls and projects suffering from hacks or other attacks. It makes the entire industry look weak and unprofessional.
A CipherTrace report from November 2020 confirms that half of the 2020 cryptocurrency-related hacks were due to insecure DeFi protocols or scams — an astonishing development — yet people keep pouring money into unknown projects. While exchanges lose more funds than…