Risk management and UX in DeFi are lacking. Solving these problems will improve DeFi both for existing and new users to drive higher yields and greater adoption.
Decentralized Finance (DeFi) is evolving faster than anyone could have imagined just a few years ago. Since January 2020 Total Value Locked (TVL) increased by about 100x, from $800m to more than $87b last month.
Services that traditional financial institutions built over hundreds of years have been copied within weeks, then improved and iterated on within months. Others that would never have been possible within the legacy system are crafted, tested, iterated and then discarded or disrupted, all before a bank can issue a press release on the topic.
Still, DeFi is far from mature, and has a long way to go in order to reach an audience outside of the Ethereum bubble.
Within this article, we will aim to break down the key points holding us back. Solutions, products and services addressing them will reach markets within the next few months, advancing the world of DeFi as a whole.
We are confident about that.
- User experiences range from cryptic to arcane
Compared to centralized offerings by fintechs like Revolut, Square or Robinhood, most DeFi interfaces look cryptic and arcane. It takes time just to understand how a product works. While some of the nostalgic designs have a certain charm, it is unlikely that their usability is sufficient to attract new customers beyond the current early adopters.
2. Yield farming takes time and requires constant vigilance
Yield farming returns are more like fixed-income TradFi products, vs. equity-like crypto trading returns. But TradFi fixed-income products are low maintenance with consistent and stable returns. The investment strategy is to “buy and forget”, while continuous payments flow into the “wallets” of holders.
DeFi is the opposite. It requires serious research and a detailed understanding of technology, economics and finance. Even after overcoming these barriers, users have to be vigilant and stay up to date with every service they use. Decentralization means that you are responsible for everything that happens to you.
Missed claiming your tokens or the right time to sell them?
Someone found an exploit and your smart contracts are being drained?
Markets are going crazy while you’re trying to spend time with your family?
3. DeFi yield optimisers don’t protect against stablecoin or protocol failures
“We don’t know what we don’t know.”
Both DeFi enthusiasts and the average investor consider the space as risky. The possibility of losing your entire invested capital worries everyone.
Current DeFi yield optimisers don’t protect against underlying stablecoin or protocol failures, and we’ve seen many examples across the DeFi world of this.
In order to onboard more users into DeFi, risk managed products are needed that allow investors to easily manage their exposure to risk according to their preferences.
4. Risk management has to be added as an extra service from a different protocol
“There’s no such thing as a free lunch”.
When DeFi users do want risk management, it’s complicated and has to be bought separately. Current DeFi insurance is sold over individual protocols for a pre-agreed amount and for a specific period of time. It’s more like travel insurance for a week-long holiday than the automatic protection you get from your bank. And when you do need to make a claim the payment isn’t automated: instead it is voted on by individuals in a DAO and the outcome can be unfair.
Most DeFi users end up ignoring insurance altogether, and just accept the risk of loss.
5. As more capital chases the same yield, yields begin to fall
Double-digit yields in DeFi will only be temporary if the underlying structure does not change.
With limited land available, more farmers bringing their ploughs to the field leads to a smaller harvest for each one. Even the OG, Ethereum 2.0 staking is down to 6.9% APY with under 150,000 validators. This is down from more than 20% at its peak.
The way for DeFi to continue catering to a growing number of farmers is to not only sow corn, but also add in barley, wheat and other crops (or products). With multiple preferences and products that cater to each one, DeFi can scale and keep everyone happy.
Instead of a game of competition, yield farming needs to become one of cooperation, with different products for different risk and yield preferences. Without this, it will be difficult to scale to more widespread adoption.
There are currently no easy-to-use, passive yield DeFi products that protect you against risks — and do it automatically.
Without simple risk tranching, new DeFi users have to accept the one size fits all and transition from no risk to all risk. Lacking nuanced offerings is a lost opportunity for more refined risk/reward distribution, enabling sustained high yields for those with the greatest risk appetite.