Decentralized Finance improved the cryptocurrency world and brought many opportunities for investors to leverage on and generate passive rewards for themselves. Ever since the coming of DEFI into the digital space, the traditional banking system has seen a huge drop in the number of users. Investors were amazed by the rewards they are generating from different DEFI products such as staking and yield farming.
Presently, DEFI is the most used cryptosystem in the world. Sadly, this system created to offer multiple sources of passive income has been turned into a tool for stealing. Bad players are currently using DEFI products to steal from investors. The liquidity meant to sustain the project is at a point, withdrawn by project developers, thereby devaluing the tokens held by their investors. Despite the open nature of the blockchain, these scammers are not easily traced. The existence of mixers made it possible for these bad players to withdraw the stolen funds untraced.
Most times I wonder why the regulators are not fighting against mixers with the same energy they are fighting against stables and DEFI projects in general.
On the other part, the smart contracts which are the backbone of DEFI projects are sometimes prone to hack. There were several DEFI project hacks in 2021. A greater percentage of them were caused by an error in the smart contract coding. Many users lost their funds to these hacks. Some were unfortunate not to receive any compensation from the hacked project. The introduction of smart contract auditing has helped to reduce the rate of smart contract exploitation. In general, DEFI projects are yet to gain the full trust of investors.
Normally, this is the case because DEFI to an extent is still new in the crypto space. It will take time for DEFI projects to be strengthened very well. The inability to trace wallet addresses to an individual is a tool that scammers are currently leveraging on in carrying out their fraudulent activities. The fact is that investors will not support any technology that will trace wallet addresses to the owner. This is because such technology will destroy privacy, and will also be a weapon for the government against investors.
The solution to these challenges faced by DEFI Project lies on the investors and the crypto projects.
The investors are responsible for safeguarding themselves from scam projects that may be rug-pulled anytime. One of the ways to do this is by ensuring that they invest only in projects that have their liquidity locked. The open nature of the blockchain offers everyone the opportunity to affirm if the liquidity of a project is locked or not. The problem most times is the fact that people want to make quick money. When investors start to give cold hands to projects whose liquidity is not locked, it will go a long way in reducing the rate of rug pull.
Crypto projects should understand that they have people's funds. They should thus put all the necessary measures that will help them secure the funds. They should employ the services of white hat hackersso that their smart contracts will be checked often.
Amidst all these issues associated with the DEFI ecosystem, it is still the best system for me. Many people earn a living through DEFI projects. The money flow has also been made easy. We only need to equip ourselves with the right knowledge that will help us survive in the digital world. The fact is that bad players will always be around. The more technology is been developed to improve security, the more loophole is been created. Nevertheless, with time DEFI projects will be strengthened.