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What other problems are holding DeFi adoption back?

Even beyond the risks involved, certain issues persist that often affect the user experience of these platforms. These include overcollateralization, centralization, low liquidity and very little interoperability between blockchains.

Another common issue with the DeFi industry is that sometimes “decentralized finance” isn’t as decentralized as it should be. It is not uncommon for new projects to give a high degree of control to the developers, so that they can develop the network and respond and fix issues as fast as possible. While this makes sense, it can lead to a situation where a DApp that is meant to be distributed is still in fact centralized in some way. This can be risky even if the team behind the product is trustworthy, as it opens the door for misuse of consumer funds. In order to balance out these issues, projects often choose a “progressive decentralization” approach, in which a product is originally under the control of the main development team but whose governance is designed to be “released” to the community over time, eventually becoming a truly self-regulated network once the kinks are worked out.

In the case of lending and borrowing, one of the biggest problems today is overcollateralization. As there are no guarantees with such a volatile market, lenders want significantly higher collateral to be put up for their loans. This leads to a situation where many lenders won’t actually work with a borrower unless they can effectively front a significant amount of assets, which undermines the essential function of borrowing. The situation then does not fulfill one of the main philosophies of DeFi, which is to bank the unbanked. It also causes notable cuts into profits made on leverage trading, discouraging that use case as well.

The other problems that make current DeFi systems slow or clunky are generally tied to low liquidity and difficulty switching between blockchains. With so many diverse currencies and tokens being exchanged, sometimes the number of traders available is simply insufficient to make moving assets around seamless. Combine this with very limited means to transfer between different commodities, which are usually focused around exchanges, and otherwise competent systems can be bogged down by sluggish movement of value. Of course, this all assumes that the underlying blockchains themselves are not currently overencumbered, which is by no means a guarantee.

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