One of the biggest movements currently taking place in the cryptocurrency and blockchain technology space is that of decentralized finance (DeFi).

In a nutshell, the phenomenon seeks to transform the way the traditional financial system operates. Whether it’s facilitating loans, banking, or investing in the stock markets - much of the current framework is reserved for the few, not the many.

By building conventional financial products and services on top of the blockchain, DeFi has the potential to make the world of finance more inclusive, efficient, cost-effective, and perhaps, most importantly, less reliant on third-party intermediaries.

However, as great as this sounds, the DeFi revolution still has a long way to go. Notably, three challenges in particular present themselves - connectivity between blockchains, blockchain governance, and the ability to replicate real-world data in an accurate and manipulation-free manner.

1. Connectivity between blockchains

In what originally started as a single cryptocurrency project in 2009 has since grown to an industry that now contains hundreds of independent blockchains. While consumer choice is always a good thing, the key problem with having such a fragmented blockchain arena is that in reality, very few blockchain protocols have the capacity to interact with one another in a secure and decentralized manner.

Whether it’s Ethereum communicating with Bitcoin or Bitcoin Cash connecting with EOS, blockchains have largely been designed to work independently of one another.

This makeד it somewhat problematic if they are unable to facilitate the needs of DeFi on a global basis. In other words, the DeFi transformation requires a decentralized bridge that allows independent blockchains to talk to one another, without utilizing a centralized third party.

While the project is still in its early days, one such solution presenting itself is that of Wanchain. The blockchain protocol bridges the gap between independent blockchains in a decentralized manner. At the time of the writing, Wanchain has already achieved its goal of connecting its own blockchain with Bitcoin and Ethereum. Other blockchains will follow suit, with EOS connectivity soon to go live.

Wanchain is currently in the process of transitioning to a new governance model called GalaxyPoS. While still in beta testnet, it has been getting much attention from network participants who wish to validate transactions, and is taking further steps towards complete decentralization.

2. Blockchain Governance

The second challenge that DeFi will need to overcome is that of blockchain governance. Notably, the blockchain industry is jam-packed with a full range of competing consensus protocols. For example, while some are centred on staking (like Wanchain), others concentrate on mining energy. The key problem is that an element of ‘Game Theory’ is present in an industry that was designed to create an equal playing field for all.

One only needs to look at the dominance Bitcoin mining organizations such as Antpool and BTC.com now possess to see that blockchain governance needs a significant overhaul.

While the cryptocurrency community are yet to reach consensus on which system should act as the de-facto mechanism, it could be argued that true governance requires incentivization on all fronts. In other words, those that actually use DeFi products should be just as incentivized as those tasked to validate transactions.

One such organization that is looking to take decentralized governance to the next level is that of ICON. Through its proposed Delegated Proof of Contribution model, those that engage with the blockchain are accustomed to an Incentives Scoring System that rewards network participants for contributing to the ecosystem.

The reward system is proportionate to the level of contribution made, subsequently resulting in a fair and equal governance framework. The project is currently in the midst of its ICONSENSUS election campaign which will see Public Representative candidates put their case forward to the ICON community.

3. Aggregating Real-World Data onto the Blockchain

The third challenge that DeFi needs to overcome is that of legitimate and accurate data aggregation. For example, let’s take the futures industry that many argue would be ideal as a DeFi product.

In terms of the fundamentals, a smart-contract mechanism would allow a DeFi futures framework to operate in an autonomous manner, insofar that prices could be extracted from real-world data sources.

While on the one hand, this would alleviate the strong reliance the industry currently has on third-party actors, how would a DeFi framework guarantee beyond a reasonable doubt that the data is accurate and free from the threats of manipulation? This is crucial, especially in the content of a futures industry that is worth trillions of dollars annually.

Recognizing this pertinent challenge to reliable data, the likes of LiquidApps have yielded a solution in the form of Oracles. By having the capacity to verify information on-chain through multiple data providers, the LiquidOracles protocol can ensure that DeFi sources data in a trustless manner.

The solution also offers a safeguard against unreliable sources, insofar that the protocol will autonomously cease staking with a provider if they are found to be untrustworthy.

Whether it’s pricing feeds relating to futures, stocks, currency exchange or interest rates, Oracles can ensure that DeFi aggregates data to the highest degree of accuracy.

The Future of DeFi?

Mainstream blockchain adoption is now a matter of when, not if. Virtually every established venture capital firm, corporation or financial institution is currently exploring the capabilities of what blockchain technology can do for their business. Some, like IBM, are well past the stage of research and development.

However, for the DeFi phenomenon to gain true global disruption from the masses, the three challenges discussed in this article must be solved. The good news is that a number of blockchain-based entities have recognized these hurdles and thus, are already offering highly credible solutions.

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