Starting to think that major DEFI protocols are going to have to decide if they are going to play by the rules that most countries want them to (KYC/AML), or if they are going to flip the middle finger at them. Invest in a compliance layer now or pay the piper later.
— Mike Novogratz (@novogratz) June 23, 2021
Often the developer of an app and a few investors own the lion’s share of the coin supply. Popular decentralized exchange Uniswap, for instance, allocated about 40% of its Uni token supply to its team, investors and advisors.
What’s more, the DeFi coins have been subject to front-running using software called bots, akin to that described in Michael Lewis’s “Flash Boys.” Many DeFi apps run on the Ethereum blockchain, whose users can chose to pay more -- a so-called gas fee -- to have their transaction processed faster. That opens the door to front running, where someone can see that a transaction is sitting in a queue, and pay more to have their own transaction processed beforehand and make money on a difference in a coin’s price.
Decentralized exchanges that are a major part of Defi have suffered from front running, which is “a realistic threat to Ethereum today,” according to one paper.
“I could essentially be the middleman with no risk,” Klaus Kursawe, a consensus researcher at Vega, which is trying to fix such problems, said in an interview. The front-running risk could deter users from accessing decentralized exchanges, he said.
Even with the technology, regulatory and other problems, many investors still see DeFi holding a lot of promise.
“I’d say the frenzy in DeFi is fading, but the long-term prospects remain strong,” said Aaron Brown, a crypto investor who writes for Bloomberg Opinion. “This is not a bubble that popped leaving nothing behind, it’s a market that got a little ahead of itself and is now retrenching a bit.”
This article was provided by Bloomberg News.