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Blockchain, DeFi, Featured, Finance

DeFi Resilience: The Challenges in Decentralization

The blockchain community’s biggest concern at present is that of upcoming regulation. There are forthcoming challenges in regard to compliance that will inadvertently lead to further improvement. But, the context lies in the extent. Integrating all existing financial compliance rules across the blockchain ecosystem is an uphill task. The question that needs to be addressed is how will existing DeFi systems address the scenario while addressing sustainable liquidity concerns.

The DeFi Slump: Hibernation or Evolution?  

High-yielding systems promising above 50% APR were the ones that initially fueled the meteoric rise of the DeFi space. It was non-sustainable, and we see the craze finally dissipating. Current DeFi systems have taken lessons from the previous DeFi-blockchain collapse and presently moving towards resilient and safer structures more suitable for the user. The core challenge still remains at their token liquidity. Decentralized projects require liquidity to bring value to their native tokens. The absence of sufficient liquidity results in a scenario we’ve known all too well- a drastic devaluation once the whales decide to dump and take profits. Sustainability has remained the core issue and continues to do so. 

Also Read: NFT Meets DeFi To Engender New Age of Finance

The DAO Scenario

Current DeFi projects are addressing the challenge either by building a governance DAO(Decentralized Autonomous Organization) or by reducing governance. The second option is unfeasible for most projects. An immutable smart contract for governance mechanism makes the entire project fragile as underlying problems can not be fixed afterward due to the contract being permanent in nature. Perfection is hypothetical, and the project will be unable to make necessary changes to adapt to the economic context.

Why is the Liquidity Problem Persisting?

The AMMs(Automated Market Makers) create a liquidity provision for a large set of participants from the market. They have demonstrated their ability to generate robust liquidity in comparison to centralized asset exchanges for DeFi projects. The challenge is then however transferred to the token holders. Once the token value rises, the token holder gets a better investment appreciation if the person keeps the token in his/her personal crypto wallet outside of pooling. This phenomenon is also known as impermanence loss and detracts investors from allocating funds in a DeFi pool.   

Several projects have started liquidity mining and financing rewards to incentivize liquidity in the long term. However, this presents additional complications. Free tokens will attract mercenary yielders who would pump, reap benefits and then dump for the next DeFi project offering rewards. This leaves the initial project starving.  

Also Read: Prevent DeFi Crypto Scams Offering High APY By Crypto Knowledge & Understanding

Is Single-Side Staking a Solution?

Single-side staking may prove to be a viable solution for DeFi liquidity concerns. Conventional AMMs pools need liquidity providers to offer 2 assets by selling half of the staked token and combining them in a pair. The token deposit while offering liquidity thus comprises 2 tokens within the pool. A single-side staking option allows the token holder to only offer the token in their possession. Therefore, the providers can enjoy actual token price exposure in addition to collecting handsome returns through yields from liquidity mining rewards as well as trading fees. 

Other Issues: Democratization

A significant issue that even highly successful protocols face is the low turnout of voters. The turnout percentage is mostly less than 5%, thus making it difficult to research consensus even for basic decisions. It undermines decentralization with the low participation bestowing powers to singular large but low-level minority stakeholders. Generating interest and raising participation stands out as another prominent challenge for the DeFi ecosystem. Some governance structures allow users to lend their voting power or add additional influence. The crypto sphere needs contributors, but the efficacy of this solution is yet to be determined.

Conclusion

To sustain the longevity of innovation, it is essential for the product to have elements of adaptability. This is applicable across all sectors of life, including evolution and system technologies across the Web 3.0 environment. The challenge lies in creating a modification consensus without centralization. Decentralized governance is essential for scaling human coordination across a trustless environment. Enhancing participation in governance is a long-term endeavor. The sustained value across the crypto ecosystem will help in creating scalable projects, adjust to change, and encourage participation across the system’s users.

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