Decentralized Finance (DeFi) has been one of the fastest-growing niches within the crypto ecosystem in the past year. This upcoming field features products such as decentralized exchanges (DEXs), derivative instruments and lending platforms. As of press date, close to $53 billion is locked in various DeFi protocols – a figure that was barely $1 billion at the beginning of 2020.
So, what has attracted more participants to DeFi? One of the apparent reasons is the market’s decentralized architecture. DeFi ecosystems eliminate third parties by giving crypto users direct access to financial products instead of relying on financial intermediaries. For instance, DEXs such as Uniswap and Sushiwap allow anyone to buy digital assets as long as they have a crypto wallet.
While the DeFi market has witnessed significant growth, this growing ecosystem faces serious security threats. In 2020 alone, DeFi accounted for over 50% of the total hacks in the crypto industry. This threat has grown bigger with more innovators launching unaudited DeFi protocols while luring their bait with lucrative yield farming and liquidity mining programs.
The Security Challenge in Trading DeFi Products
The decentralized architecture of DeFi products is a fundamental advantage over traditional financial services offered through central parties. Ideally, these digital assets are traded on DEXs while their counterparts trade on centralized exchanges (CEXs). With CEXs facing the threat of regulation, crypto users are pivoting to DEXs for their trading activity.
However, the question remains on whether DEXs provide fully secure trading ecosystems. Recent months have seen multiple exploits that have left project owners and investors in limbo. In some cases, the developers themselves manipulate smart contracts to benefit from what is now referred to as a ‘rug pull’ by the crypto community.
Despite the challenges, this nascent market continues to show massive potential for growth. Innovators are now integrating security-focused solutions to protect DeFi users. Some of the DEX projects that appear to have made progress in security include Polkadex, a fully decentralized peer-to-peer order book and dTrade, an options and perpetual DEX built on the Edgeware blockchain infrastructure.
Building A Secure Future for DEXs
For the DeFi to thrive, the industry depends on secure ecosystems such as Polkadex and Edgeware. Notably, both infrastructures leverage the parity substrate framework, allowing developers to launch a working blockchain that features Proof-of-Stake (PoS) validators, PBFT consensus, a WebAssembly runtime and libp2p networking.
Polkadex DEX Order Book
The Polkadex decentralized order book is a first of its kind in the DeFi market, given that most projects leverage the Automated Market Maker (AMM) model. This ecosystem combines the benefits of centralized and decentralized exchanges to introduce a decentralized trading platform that features the same UX as centralized exchanges.
Built on the substrate framework, Polkadex is designed to enable high liquidity, fast transaction speed and a high-frequency trading environment. In addition, the project features an IDO platform and mobile application that allows users to integrate their cold wallets. Notably, Polkadex enjoys the backing of prominent VCs such as Web3 Grant, which helped bootstrap their initial funding. This project was also accepted as a member of the DeFi Alliance.
On the other hand, Edgeware is providing a secure DApp building ecosystem that the project’s community-owned treasury complements. This smart chain infrastructure supports DApp development by allowing users to access a WebAssembly runtime and toolchains that support rust smart contracts. In addition, the platform enables Ethereum developers to deploy EVM/Solidity smart contracts without significant changes.
One of the successful DEX platforms built on Edgeware is the dTrade options and perpetual decentralized exchange. This DEX allows crypto users to trade any perpetual or options with up to 16x leverage. Furthermore, stakeholders can add more assets by proposing through dTrade’s decentralized governance. It is also noteworthy that dTrade has built a USDC bridge to support stablecoin settlements and fast withdrawals.
The Value Proposition of a Secure DeFi Ecosystem
The DeFi market may still be in its early stages of innovation but already showing signs of becoming the future of finance. More capital has been flowing into DeFi projects, with the number of users also on the increase. Die-hard crypto enthusiasts have since nicknamed this niche the ‘future of France’, noting that it is a glimpse into what tomorrow’s financial ecosystems will look like.
Successful as it may be, security remains a fundamental part of this market. The DeFi industry will require the combined effort of stakeholders, including innovators, users and regulators, to build secure decentralized solutions. We already see progress with some DeFi projects such as Polkadex and Edgeware’s dTrade. However, most DeFi protocols are still exposed to security vulnerabilities.
DeFi products offer the world an opportunity to move away from centralized financial services, which have long been a fort of the bankers and investment firms. While it may take some time before retail understands the value proposition, a shift to DeFi ecosystems will soon be inevitable. One way that stakeholders can prepare for this mainstream adoption is by building secure DeFi environments that will inspire confidence in institutions and retail consumers.