DeFi-ning DeFi: Challenges & Pathway

TL;DR

This paper explores the potential, current state, challenges, and future prospects of decentralized finance (DeFi), highlighting its advantages over traditional finance and analyzing its economic aspects.

Contribution

It provides a comprehensive survey of DeFi products, categorizes existing services, discusses major challenges, and offers insights into future development pathways.

Findings

DeFi offers significant advantages over traditional finance.

Major hurdles include scalability, security, and regulatory issues.

Economic analysis reveals sustainability challenges and growth potential.

Abstract

The decentralized and trustless nature of cryptocurrencies and blockchain technology leads to a shift in the digital world. The possibility to execute small programs, called smart contracts, on cryptocurrencies like Ethereum opened doors to countless new applications. One particular exciting use case is decentralized finance (DeFi), which aims to revolutionize traditional financial services by founding them on a decentralized infrastructure. We show the potential of DeFi by analyzing its advantages compared to traditional finance. Additionally, we survey the state-of-the-art of DeFi products and categorize existing services. Since DeFi is still in its infancy, there are countless hurdles for mass adoption. We discuss the most prominent challenges and point out possible solutions. Finally, we analyze the economics behind DeFi products. By carefully analyzing the state-of-the-art and discussing current challenges, we give a perspective on how the DeFi space might develop in the near future.