2023 started off on a great note for the DeFi ecosystem with double-digit gains recorded for the majority of the coins. Simultaneously, January marked several bull rallies and a 93% year-on-year decline in losses from hacks and exploits.

Moreover, recent figures suggest that DeFi protocols experienced a big-time growth in TVL across multiple staking pools in the first month of the new year. The market increased 26% in terms of staked assets in comparison to December, recording a total of $74.6 billion.

Meanwhile, web3 has started to penetrate almost every industrial, including the traditional sectors. Especially the financial markets which have transformed advanced technology that streamline corporate operations and procedures. Additionally, one of the key use cases for the sector that gets rid of middlemen and lowers transaction costs is DeFi dApp development.

Whether it be loans, investments, trading, or transactional processes, DeFi provides transparency, security, and speed to each step. However, with the development only in its initial phase, dApps are subject to certain challenges that we will explore today in this blog.

What are DeFi dApps?

Anybody with an internet connection is now able to take advantage of a new generation of financial services thanks to decentralized finance (DeFi) and decentralized applications (dApps).

Web services called decentralized applications (dApps) are constructed on top of a blockchain. Applications can be made transparent (all transactions and activity are freely and easily accessible to the public and viewable), immutable, and trustless (no participation or verification from centralized, third-party intermediaries is needed) by using a blockchain like Ethereum (i.e., all transactions and activity are verified and secured to the blockchain and cannot be manipulated).

Top Challenges DeFi dApps Struggle With

Absence of regulatory framework

DeFi is a decentralized structure that is not governed by a central bank, authority, or outside party. It runs independently and imposes certain legal constraints. Traditional banking systems are heavily regulated as a result of financial crimes like money laundering and terrorist funding. A centralized financial system, however, closely monitors transaction procedures, and any fraudulent transaction promptly bans the sender and receiver accounts. Meanwhile, the DeFi system does not include this type of protection.

Exploitation threats

Since blockchain is an immutable ledger, it is difficult to alter the records. Unfortunately, some DeFi components are vulnerable to hacking, which may ultimately lead to money losses and data breaches. DeFi protocols are reportedly weak and accountable for the loss of about $4.75 billion triggered by fraudulent transactions, exploits, and hacks, according to the REKT database of cyber-attacks study. The most common kind of cyberattack across the sector is a honeypot attack.

Weak DeFi protocols, which are more vulnerable to security attacks, are also to blame for harming businessmen’s reputations.

Scalability

The DeFi DApps enable two key advantages including security and transparency. Yet, performance inefficiency is one of its primary disadvantages. DeFi solutions have scalability problems as well as poor transaction speeds in comparison to centralized banking systems. Additionally, processes end up taking too long and ultimately impact the network’s overall performance.

Lack of expert developers

Hiring developers and industry experts poses difficulties for DeFi projects and enterprises. Businesses look for professionals with expertise in both blockchain and non-blockchain fields who are familiar with the finance workflow and the appropriate technology that could complement potential solutions. The fact is that the cryptocurrency industry is expanding quicker than other industries, while developers are keeping up with the pace by learning and implementing new technologies. Moreover, they are also considering their viability and potential drawbacks for decentralized finance projects which is one factor contributing to the lack of qualified resources.

Smart contracts restrictions

The DeFi dApps’ intermediaries’ primary roles and responsibilities are fulfilled via smart contracts. Thus, the error-free nature of smart contracts is crucial. Smart contracts must use an effective and safe code design to prevent hackers from taking advantage of the ecosystem. Theft of tokens, the deletion of wallets, the removal of users, etc. are just a few examples of how flaws in the code structure can result in financial loss. Further problems include:

• Low performing smart contracts
• Lost payment
• Operations problems

High transaction fees

Liquidity in the context of cryptocurrencies refers to the ease with which a digital asset may be purchased or sold. For instance, there are many various types of digital assets available on the Ethereum dApp development market, making it challenging for customers to select a particular currency when its value is constantly fluctuating. Limited liquidity indicates that there aren’t enough assets and that the market’s turbulence is driving up the price of cryptocurrencies.

As a result, insufficient liquidity results in expensive transactions, particularly when a particular cryptocurrency is not supported or is not available, leaving buyers and sellers of digital assets with little choice except to pay a large commission. Users are unable to swap their assets as a result, which negatively impacts the effectiveness of financial systems.

Conclusion

Through this blog, what we can conclude is that the process of designing and creating a DeFi dApp is really complex. Projects involving decentralized finance may experience difficulties due to complex technological frameworks and strict but ambiguous regulatory requirements. But, as time passes, DApps development firms actively resolve these issues. To address issues and create scalable platforms, they are hiring and training DApps developers specifically for the finance sector.