What Failed in DeFi and Possible Solutions


There is quite a flurry of interest surrounding Decentralised finance (DeFi) as it seeks to reprogram traditional finance. A few exceedingly wealthy individuals enjoy most of the wealth thanks to our centralised finance system.

According to recent data, the gap between the super-rich and everyone else is growing wider. The collective wealth of the wealthiest 22 men on the globe is more than the wealth all the women in Africa. Also, more than 4.6 billion worth of assets are controlled by 2,153 individuals.

DeFi could decentralise and balance financial services the way cryptocurrency has decentralised money. On paper, a series of linked dApps will take over conventional financial institutions. They will form connections made up of peers instead of aloof banks.

In 2019, dApps users grew by over 600%. Close to $1b is accumulated in DeFi systems.

Hurdles to Access to Credit
Wealthy people have access to loans and can generate more wealth because they have more capital. The World Bank estimates the number of unbanked people at 1.7 billion, down from 2 billion.

DeFi hopes to turn this around with a transparent structure that governments and banks cannot trifle with.

Cryptocurrency to the Rescue
DeFi plans to use cryptocurrency to achieve its objectives. Some people feel that cryptocurrency is a non-producing asset as there are no monetary returns to the investor. Equity shares pay dividends from profits when the investors hold their sock.

Cryptocurrency lending systems will mimic this system and also improve cryptocurrency’s proposition value. Maker takes the priority. Of the $870m accumulated in DeFi projects, Maker has a 54.7% market share.

Defipulse has its finger on the pulse of the market. At present, power is the Ethereum blockchain. Even with the competition from other blockchains, the majority are structured on Ethereum.

How Does Maker Work?
MakerDAO has been building a system that takes an investor’s Ethereum in exchange for a loan. The loan is pegged 1:1 against the US dollar. For 1 Ethereum, the investor gets a 66% DAI loan. Should the price of your Ethereum be higher when you pay back your loan, the difference is yours.

DeFi’s process is decentralised and registered on the blockchain and executed by utilising smart contracts. The Ethereum is the collateral. Your Ethereum is secured in a vault to be recovered when the loan is repaid.

Unlike a bank’s vault, which is controlled by people, this one is controlled systematically by smart contracts. This Collateralised Debt Position (CDP) is beneficial as you can spend DAI while holding onto your crypto investment.

Failure of CDPs
Black Thursday happened in March 2020 in a persistent stock market sell-off. It caused widespread panic among investors as markets went into free fall.

Approximately 3,000 MakerDAO users are currently suing the issuer of Stablecoin. They assert that it misstated the risk of owning CDPs.

Next for DeFi
Market analysts call attention to DeFi’s maturity when addressing critics. Many investors recognise the Black Thursday fiasco as an unprecedented occurrence. Systems that use smart contracts are set to return to best-performing and most stable price positions.

ETH 2.0 is expected to solve scaling and congestion concerns. There has been a rise in the use of Stablecoin, and the $870m has increased by $300m. The market stands at $1.23m and counting.

Source: bigx.com