Defi – Decentralized

Finance
1.1 Introduction

Decentralized Finance (DeFi) is a rapidly growing segment

of the blockchain and cryptocurrency ecosystem that seeks
to disrupt the traditional financial system by creating a
more open, transparent, and accessible alternative. DeFi
projects typically use decentralized networks and smart
contracts to offer financial services that are more
affordable, efficient, and globally accessible, without
the need for intermediaries such as banks or other
financial institutions. Some of the most popular DeFi
applications include decentralized exchanges (DEXs),
stablecoins, lending and borrowing platforms, and
liquidity pools, which enable users to earn rewards for
providing liquidity to the system. While still a
relatively new concept, DeFi has the potential to
revolutionize the way we think about finance and create a
more equitable financial system for everyone.

1.2 Statement of the problem

One of the challenges of DeFi is its inefficiency, as

processing data on the blockchain requires a
significant amount of energy. Another issue is the
high gas fees that users have to pay for
transactions, which can be a barrier for some
participants. Additionally, the volatility of the
market makes DeFi risky as prices can change rapidly,
affecting loans and other transactions. However,
stable coins pegged to the dollar can provide a
measure of stability to DeFi platforms. While the
blockchain itself is highly secure, the smart
contracts that run on it are susceptible to human

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error, such as coding bugs and loopholes that can be
exploited by hackers. Therefore, continuous efforts
are needed to improve the security and usability of
DeFi platforms.

1.3 Objectives of the study

To identify the key challenges facing DeFi, such as

inefficiency, high gas fees, volatility, and security
risks.
To explore the causes of these challenges, such as
the technical limitations of blockchain technology,
lack of regulation, and human error in coding smart
contracts.
To analyze the impact of these challenges on the DeFi
ecosystem, including the effects on users, investors,
and the wider financial market.
To recommend potential solutions to address these
challenges, such as improving the scalability of
blockchain technology, increasing regulatory
oversight, and improving security protocols for smart
contracts.

1.4 Methods of data collection

The data for this report was collected through

Secondary Data Analysis from various sources,
including a YouTube video on the problems with DeFi
and online research. The YouTube video provided
valuable insights into the challenges facing DeFi,
including its inefficiency, high gas fees,
volatility, and security risks. The video was hosted
by an expert in the field, who presented a detailed
analysis of the issues and their impact on the DeFi
ecosystem.

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1.4 Methods of data analysis

The data collected for this report was analyzed using

a qualitative approach. The information obtained from
the YouTube video and online sources was carefully
reviewed and organized into categories based on the
challenges facing DeFi, such as inefficiency, high
gas fees, volatility, and security risks.

The data was then synthesized to identify the

underlying causes of these challenges, such as the
technical limitations of blockchain technology, lack
of regulatory oversight, and human error in coding
smart contracts. The impact of these challenges on
the DeFi ecosystem was also examined, including the
effects on users, investors, and the wider financial
market.

To ensure the reliability of the data analysis,

multiple sources were used to corroborate the
findings. Additionally, the conclusions drawn from
the analysis were reviewed and validated by an expert
in the field.

Overall, the qualitative approach allowed for a

comprehensive understanding of the problems facing
DeFi and their potential solutions. By synthesizing
and analyzing the data collected, the report was able
to provide valuable insights into the challenges
facing the DeFi ecosystem and the potential
strategies for addressing these challenges

1.5 Time frame of the study

This report covers the period from 2021 to 2022 and

represents an analysis of the challenges facing the
DeFi ecosystem during this time frame. The data for
the report was collected and analyzed throughout this

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period, with a focus on capturing the most recent and
relevant information.

Throughout 2021, the DeFi ecosystem continued to

grow, with an increasing number of users and
transactions. However, the challenges facing DeFi,
such as inefficiency, high gas fees, volatility, and
security risks, also became more prominent during
this period. The impact of these challenges on the
wider financial market was also examined.

In 2022, the DeFi ecosystem faced additional

challenges, such as increased regulatory scrutiny and
the emergence of new market entrants. These
challenges further highlighted the need for solutions
to the existing problems facing DeFi.

1.6 Scheme of the report

I.Introduction

● Background information on DeFi

● Purpose and objectives of the report

II.Methodology

● Methods of data collection

● Methods of data analysis
● Sample size
● The time frame of the study

III. Challenges facing DeFi

● Inefficiency
● High gas fees
● Volatility
● Security risks

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IV. Causes of challenges facing DeFi

● Technical limitations of blockchain technology

● Lack of regulatory oversight
● Human error in coding smart contracts