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Ethereum co-creator outlines challenges the DeFi sector is facing

  • Ethereum’s co-creator, Vitalik Buterin, highlighted the risk for the platform by relying too much on projects in the DeFi sector.
  • Buterin specifically pointed to those projects that put users at risk by offering a disproportionate percentage of profits at great risk.

Ethereum co-creator Vitalik Buterin spoke about the DeFi sector and its biggest challenges today. Buterin made a series of tweets in which he recognizes the benefits that DeFi has brought to Ethereum, its users and also about its risks.

During 2020, Ethereum has been one of the most appreciated cryptocurrencies due to two main factors: the expectation of the launch of phase 0 of Ethereum 2.0 and the growth of the DeFi sector on the platform. Recent data collected by Dune Analytics shows this growth and states that the number of active users in the DeFi sector has increased by 100% since December 2019 to nearly 200,000 users.

DeFi sector and its risks for Ethereum users

The DeFi sector has been gaining popularity, as the numbers of Dune Analytics show, due to the possibilities that users have when using the DeFi protocols. These fulfill the functions of a bank, but without the need to meet certain requirements such as revealing the identity of the user or the approval of a bank to obtain a credit. The great appeal of DeFi is that its protocols follow, in theory, the principles of Bitcoin: they are decentralized and permissionless. Some analysts have said that the growth of this sector will eventually have a positive impact on Ethereum’s price.

Despite this, the DeFi sector has been criticized for showing a high degree of centralization. However, the protocols maintain privacy and give access to financial services to numerous users without violating their privacy. Nevertheless, DeFi protocols for loans or protocols that offer exorbitant profits in a short period of time are a risk for the user. Buterin referred to the above, recognizing one of the biggest obstacles for this sector:

Honestly I think we emphasize flashy defi things that give you fancy high interest rates way too much. Interest rates significantly higher than what you can get in traditional finance are inherently either temporary arbitrage opportunities or come with unstated risks attached.

Buterin went on to acknowledge that new investors attracted by the DeFi sector have brought new capital to Ethereum. However, Buterin stressed that the platform cannot become completely dependent on these projects. In addition, Buterin advised the community to be cautious of systematic risks when dealing with some DeFi protocols. In that regard, Buterin said:

Decentralized finance should not be about optimizing yield. Rather, we should be solidifying and improving a few important core building blocks: synthetic tokens for fiat and a few other major assets (aka stablecoins), oracles (for prediction markets etc), DEXes, privacy.

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