Key Hurdles For Mainstream DeFi Adoption

Is there a demand for DeFi Applications?

10 min readOct 4, 2022

The benefits that decentralized finance applications offer are in high demand. Benefits for users like self-sovereignty and freedom through maintaining actual ownership (not just a claim).

DeFi can be censorship-resistant and equally accessible to all (not exclusive, with no credit scores or accredited investor laws). Its digital and globally distributed nature makes it a borderless economy (globally agnostic).

From a perspective of an alternative to the legacy financial system, we see greater transparency, flexibility, and sustainability in cycles of growth and decline due to free markets void of central banks or government interventions/bailouts.

In the current fiat-based financial system, more and more debt is required to keep the system running. It is an unsustainable design where incentives do not align with the majority’s best interests. (If this interests you, check out @JeffBooth’s book and interviews on the topic.)

The DeFi market has the potential to be more efficient due to financial services running 24/7 365 through code (smart contracts). Also, removing the middlemen means fewer management/service fees for users.

Lastly, because the “currencies” used are verifiable tokenized assets on a blockchain, as opposed to permission-given ownership claims, they can be transferred in real-time in the digital economy (reaching final settlement).

This is not the case for banking or fintech services which provide liquidity when they instantly transfer funds to and from (added costs and credit risks).

The actual funds aren’t delivered until final settlement occurs periodically, which takes three-plus business days in our antiquated financial system. Not to mention all the added complexity, cost, and limitations that international finance operations incur.

With all these benefits and a legacy financial system that benefits the rich at the cost of the common man, it is clear that crypto can help solve many of the issues the world faces today.

In many ways, the incumbents in the traditional finance (tradfi) world don’t have the incentives to meet these changing demands consumers are beginning to show. When money is moving from tradfi to DeFi, they will, but that leaves us, the crypto industry, with a window of opportunity to expand and build the products consumers need and want.

The DeFi industry isn’t ready for mass adoption, and many currently live projects are not user-friendly, to say the least. Let’s look at what must be done to become an alternative and mature financial system for all.

Regulatory Clarity

We’ve all heard this discussion before, even though little has been implemented into law.

Although it is not guaranteed, regulatory clarity would probably embolden tradfi institutional players to use and invest in DeFi applications. All institutions have strict limitations regarding interacting with unregulated industries.

As a side note, beyond regulation/compliance issues, institutional investors are particularly deterred by crypto assets’ volatility and security.

Regulation would also provide a sense of safety assurances and protections for retail consumers. The effectiveness of this is up for debate. However, some positive outcomes include clear guidelines on products and services being accurately marketed and transparency standards that at least begin to create an even playing field in the industry.

Many legal protections we are used to when engaging in financial transactions aren’t currently enforced in DeFi or crypto CeFi. Early adopters of DeFi have to rely on their own due diligence and risk management capabilities.

Those who have put in the time to understand DeFi are, in some ways, being rewarded for their efforts with higher returns, namely higher yields. However, many newcomers stop there and don’t look deep enough to evaluate the risks properly.

This eventually leads users to experience losses through hacks, rug-pulls, and too-good-to-be-true, unsustainable yields. With consumer protection laws and tradfi companies getting the green light to custody crypto assets and interact with decentralized protocols (dapps), mainstream adoption would surely follow.

Tradfi service providers don’t have to get involved for DeFi to continue seeing increased adoption. Still, it speeds up the process and creates a larger total addressable market (TAM). This is because there will always be a good portion of people that do not want the responsibility of being their own bank. Especially as it is currently, having proper security of your digital assets and interacting with dapps with a crypto wallet is far too complex and cumbersome for many to learn.

Clear and sensible regulation allows intermediaries to bridge the gap to DeFi markets for the users that need it. Consumers would be on-boarded via centralized entities and get to take part in some, emphasis on some, of the benefits of DeFi in a user-friendly and familiar experience. However, quality front-end interfaces and streamlined user experiences don’t require a completely centralized platform as the middleman.

Streamlined and Simplified User Experiences

Crypto Industry builders are hard at work designing user experiences that are as close to web 2.0 as possible. This is not a simple task due to fundamental differences between typical applications/websites and decentralized applications. Dapps add more complexity because they have to work within smart contract limitations. Also, the data, messaging, transactions, etc., that these smart contracts facilitate are recorded to decentralized blockchains (distributed servers/ledgers) instead of a company’s internal data server.

Essentially, this means that the loaded term “decentralized,” with all its good qualities, comes with some trade-offs. Primarily in the added complexity of interacting with protocols directly or permissionless (no intermediary.) Stripping away the complexity is one of our key strengths at Clip Finance. Our product has a significantly improved user experience. We should expect UI and UX in DeFi to continue getting closer and closer to being accessible for the mainstream user.

More specifically, here are some ideas DeFi protocols should focus on:

Provide transparent and accessible explanations of what is happening under the hood of a DeFi protocol — interpreting smart contract code so that users can understand what they are signing off on.
Transparent real-time data so users can see parameters such as collateralization ratios and interest rates on each DeFi protocol and even receive notifications automatically based on that public data.
Users should be able to deposit or withdraw tokens, pay back loans or rebalance their portfolio with a simple click of a button without having to go through as many steps. Many UIs are unnecessarily filled with crypto jargon.
Develop transparent and safe storage of private keys, easy to set up and understand multi-sig security, and simplified private key recovery features.
Provide a safe and secure wallet that allows users to easily deposit, trade, exchange their tokens, and pay back loans all in one place.

Education

Throughout the adoption cycle, the industry must continue to focus on education. The amount of quality educational content produced on DeFi and adoption growth rates go hand-in-hand. This includes educating regulators, boomers, gen-Zers, and, well, everyone all across the world.

Areas where education is needed the most:

Pros and cons of self-custody versus custodial services. The added responsibility and freedom from genuinely owning your money.
We must continue educating on the current most accessible and most secure options for self-custody.
Efficiency benefits of DeFi markets and digital assets compared to tradfi alternatives.
Educate retail consumers on the necessary crypto and financial terminology, things like collateral, liquidation, yield, smart contracts, public and private keys, block explorers, liquidity pools, inflation, diversification, etc.

Volatility

Volatility is a short-term concern that is natural for any new asset class and will decrease as adoption and market size grow. Volatility also has redeeming qualities; after all, no one complains about volatility to the upside.

When prices are going up, it brings attention to the space. Every bull market we see this cycle play out, but the key is that some of those newcomers, speculators included, get educated and stay throughout the bear market. This is why adoption grows over time. That being said, regulators (not just in the US) being more restrictive on what leverage centralized exchanges can offer users can dampen volatility.

Improved Security

Although blockchain technologies offer several security benefits, every technology represents new opportunities for malicious attackers, not to mention user errors. Smart contract vulnerabilities and hacks occur too often to be ready for mainstream adoption.

In this article, “8 best practices for blockchain security”, the author sets the stage for why security is so essential and regulation’s role in this.

“In a world of distributed record-keeping and decentralized applications, individuals must assume greater responsibility for their online security, and businesses must also protect customers’ data and assets. For both, this begins with a security mindset. Consumer, employee, executive: Cybersecurity hygiene applies to all.

Decentralized finance-related breaches constituted 76% of all significant hacks in 2021, with over $1 billion lost in the third quarter alone, according to Atlas VPN. Blockchain-based attacks come from outside actors, as well as insiders. Many of these hacks used common tactics, such as phishing, social engineering, attacking data in transit, or targeting coding mistakes. Smart contracts are not a replacement for compliance — they aren’t legally binding. An unclear regulatory environment slows adoption and enables cybercriminals to thrive.”

One of the critical reasons why security is lacking in the blockchain industry is a talent shortage. The cybersecurity landscape already suffers from this challenge, which is even more severe in the blockchain industry.

Crypto companies must compete with established tech giants for the limited supply of cybersecurity professionals. This is likely a problem that gets gradually better over the next decade as increased demand for cybersecurity, in general, is leading to better compensation, and thus more people will be drawn to the field.

Those building DeFi applications and infrastructure to onboard mainstream users should understand the importance of adequately investing in security.

This is a natural progression in the industry as the early days are focused on experimenting and finding an initial product market fit, but once found, the next step is to scale to the masses. This is when investing in quality cybersecurity professionals and innovative security research and development is a must.

Technological Improvements

Here are some ways the technological infrastructure behind DeFi can become ready for mass adoption.

Scalability

We cover this in-depth in this article (Scaling issues & Comparing Blockchain L1s and L2s)

Continue to improve the scalability and throughput of layer-1 and layer-2 blockchains. Reduce the cost of interacting with smart contracts (transaction fees/gas fees).

Interoperability

Interoperability across blockchains dramatically improves the user experience. While it adds complexity for the developers, they can strip away the complexity for the end user. This makes it possible that people won’t have to know or care what blockchain their transactions are routing through. It also improves liquidity by allowing cross-chain liquidity sharing.

Improvements in governance

Decentralization and fast-moving tech startups are at odds with each other, which is why newer projects will usually be more centralized than older ones. To be upgradable at the pace required, the current state of governance for truly distributed ownership projects doesn’t cut it. Decentralized autonomous organizations (DAOs) run into issues with getting active voting participation.

The project has to strike a balance between core developers and contributors being able to make changes with proper checks and balances. Lastly, making sure that value is distributed fairly to contributors and that they are incentivized is an area that can improve.

Here is what one of Clip Finance’s core contributors, Mikk has to say on the topic.

“I think governance can play a role in adoption. Governance has been an afterthought for most DeFi protocols. It is currently done through rather clunky models of discord (chat rooms) + voting platforms, which don’t cut it as a long-term solution. DeFi protocols should think more professionally about governance and have higher voting participation standards.

This requires designing governance models with a better user journey for understanding the importance of participating in governance and making it easier to participate.”

Improved governance models potentially unlock government-resistant decentralized protocols to thrive and compete with the more centralized projects. This could be necessary if we get unfavourable, heavy-handed regulations in our industry.

If so, you will see a bifurcation between prominent players that are fully compliant and require KYC (know your customer’s identity) and smaller, more decentralized projects outside the legacy system.

Industry Experts Opinions

Julian Koh is the CEO and Co-Founder of Ribbon Finance.

“DeFi has proven to be extremely resilient in the recent market downturn. While many CeFi platforms like Celcius and Voyager went bust, all the major DeFi platforms like AAVE and Compound were still intact and worked perfectly. This is largely due to the transparent collateralization mechanisms and the immutable nature of blockchain and also showcases the potential of DeFi to become the backbone of finance in the future.”

Zen (Zhen Yu) Yong is the CEO of Web3Auth.

“One of the fundamental core aspects of DeFi is self-custodial ownership of assets. The recent implosion of CeFi platforms such as Voyager and Celsius and the subsequent freezing of user assets highlight the importance of dealing with account censorship and restriction to access. DeFi is here to stay, but volatility isn’t the main roadblock to mainstream adoption — accessibility, education, improvement to UI, UX, and security are. Builders need to make it simpler and safer to access and adopt DeFi. About $545M of digital assets were lost from users forgetting their seed phrases and other silly mistakes. But that doesn’t have to be the norm when you can securely manage keys through distributed modules only accessible to the rightful owners.”

Conclusion

For DeFi to go mainstream and become a legitimate alternative to the existing financial system, it must address the current hurdles. Building a seamless user experience with greater security standards is the way. Regulators will be forced to make decisions as the industry continues to grow.

Designing a reliable, transparent, and efficient DeFi project that can be appreciated at scale by everyday people is challenging, but we are doing just that at Clip Finance.

The Clip Finance protocol is a single-click yield optimization protocol. We find the best opportunities in DeFi, auto-compound your rewards, and diversify your risks by routing your funds to multiple yield-earning strategies.

Smart contracts execute the process from choosing the method, routing the user funds, auto compounding, and exiting underlying yield farms without active human intervention. We emphasize transparency, a streamlined user experience, and sustainable yields for our users.