Why DeFi is not currently 100% decentralized?


Decentralization is a crucial aspect of Blockchain technology, and it’s what sets it apart from most other forms of data storage and transfer. When it comes to applications built on the blockchain, the degree of decentralization is often measured in terms of “on-chain” vs “off-chain” activity. An on-chain application is one where all relevant data is stored and modified on the blockchain itself, while an off-chain application is one where some of the data is stored off the blockchain, on traditional servers.

In traditional centralized systems, such as those used by banks, governments, or social media platforms, all data are managed by a central authority. This means that users have to trust this central authority to act in their best interest and protect their data from unauthorized access or manipulation. However, centralized systems are vulnerable to corruption, hacking, or other forms of malicious activity. Decentralization, on the other hand, distributes data and control across a network of nodes, making it almost impossible for anyone to maliciously manipulate the system.

Building a trustworthy application without having to rely on actual insurers or the justicial system is key. With traditional systems, users often have to navigate through complicated workflows and deal with slow, bureaucratic processes that can be frustrating and inefficient. Decentralized applications, on the other hand, use innovative technologies such as blockchain and smart contracts to automate processes and eliminate intermediaries to execute and satisfy some of your needs in a few seconds. This means that users can transact with each other directly, without the need for a third party to oversee the process. The result is a faster, more streamlined user experience that can save users significant amounts of time and effort.

While many blockchain applications boast a high degree of on-chain activity, most of the time there is still significant off-chain activity, which can have a significant impact on the overall decentralization and security of the application. Here’s why decentralizing this remaining activity matters:

  1. Centralized control: If a significant portion of the data is stored off the blockchain, it opens the door for centralized control. This is because the data that is stored off the blockchain is usually controlled by a single entity, making it easier for them to manipulate the data and compromise the security of the application.
  2. Lack of transparency: When some of the data is stored off the blockchain, it becomes less transparent and can be more difficult for users to verify the accuracy of the information. This can undermine the trust in the system and make it harder for users to make informed decisions. Users are also assured that only the necessary data are stored and used.
  3. Scalability issues: Off-chain data storage can also pose scalability problems, as the data that is stored off the blockchain can become difficult to manage and retrieve as the size of the application grows. This can slow down the overall performance of the application and make it less efficient.
  4. Increased vulnerability: Storing sensitive data off the blockchain also increases the vulnerability of the system, as the data is more susceptible to being lost, stolen, or corrupted. This can lead to data breaches and significant security risks for the users of the application.
  5. Using an efficient, secure, and public infrastructure: Why would you wait several days or weeks to start using your assets or buy a house?
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Issues of decentralization

This long-term trend, still in heavy development, comes with some drawbacks:

  1. Bad UX: Decentralized systems often come with a steep learning curve and a less-intuitive user experience, which can be a major barrier to adoption for non-technical users. For example, existing (and rare) applications that are totally on-chain might have slow loading times and long transaction processing times. Interacting with it may require users to download a new wallet, learn how to use it, and navigate a new interface to complete transactions.
  2. Incomplete decentralization gives misleading trust: Some decentralized systems claim to be fully decentralized, but in reality, they may still rely on a centralized component or authority to function. This can lead to a false sense of security and trust, as users may assume that their data or transactions are fully protected by the decentralized network, when in fact they may be vulnerable to manipulation or attacks on the centralized component. For example, a dApp that claims to be decentralized but still relies on a centralized database for storing user data would not be fully decentralized. Same for DeFi applications that use off-chain order books or liquidators.
  3. Introduces many new concepts: Decentralized systems require a new way of thinking about trust, ownership, and governance. This can be challenging for users who are used to relying on centralized authorities to mediate their interactions with digital services. Decentralized governance models (DAOs) often involve community-based decision-making, which can be difficult to understand or participate in for users unfamiliar with blockchain-based communities. Similarly, decentralized ownership models may require users to understand complex concepts such as private keys, smart contracts, and token economics.
  4. Network congestion: As decentralized networks become more popular, they can become congested, resulting in slow transaction processing times and higher transaction fees. This can lead to delays in the execution of smart contracts, which can impact the UX and functioning of decentralized apps.
  5. Regulatory challenges: Decentralized systems often exist in a legal gray area, as they may not fit neatly into existing regulatory frameworks. This can make it difficult for developers and users to understand the legal implications of their actions within decentralized networks. Additionally, decentralized systems may be more difficult to regulate or enforce, as there may not be a clear authority to hold responsible for non-compliance. This can create uncertainty and risk for users and developers alike. However, this trend challenges our actual mode of operating by innovating faster than ever.
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Decentralization comes with many challenges that still need to be solved to become more attractive. The huge benefits we discussed previously promise an exciting development.

Dusa Protocol is working hard to tackle most of these issues to build a fully on-chain, efficient, and UX-friendly Decentralized Exchange in the following few months. Go check it out!

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