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DeFi Sunday: DeFi must focus on improving privacy

The DeFi industry certainly boasts a literal rocket launch and development that other industries can hardly compete with. However, this does not mean that there are no challenges for the developers. One of the biggest obstacles to the inflow of institutional capital is the protection of privacy on a fully open platform.

DeFi is considered to be one of the best use-cases for blockchain

Just about a month and a half ago, MakerDAO, in collaboration with the Centrifuge project, managed to make its first real-world loan on DeFi. MakerDAO is often referred to as a kind of central bank of the DeFi world, and this fact only confirms it. This is an important milestone in decentralized finances, which may represent an important breakthrough in the financial world as we know it.

The financial institutions of the future will be able to provide their services 24 hours a day and smart contracts will guarantee that the issue of trust in the institution and its practices will no longer be on the table. Among other things, it will also bring low-interest loans and access to immediate liquidity with minimal capital costs. DeFi thus opens the door to a new trillion market and various companies will certainly not want to miss this opportunity.

Financial institutions are guarding their privacy and will certainly not compromise on this

DeFi is gradually gaining the attention of even the largest financial institutions. Only recently has Bank of America published a report suggesting that, given the existence of DeFi, they predict a more optimistic future for Ethereum than Bitcoin. However, decentralized finances are not yet fully prepared to take on the tasks of traditional finances. For example, for Ethereum, the biggest problems at the moment are high transaction fees, the efficiency of transaction processing and, in particular, the lack of protection of users' privacy.

DeFi: Privacy as a key to success DeFi: Privacy as a key to success, Source: shutterstock.com

Traditional investors, banks and various institutions attach great importance to the protection of their privacy. It is very unlikely that they would allocate all their finances to a fully open platform where everyone can see them. This allows everybody to accurately monitor users' financial behaviour and even predict their next steps.

In addition, the open platforms provide sensitive financial information that can be misused by various attackers. Thus, we cannot assume that investors would voluntarily take a similar risk. Protecting transactions information will reduce the risk of attacks or arbitrage.

The DeFi sector needs to make significant efforts to improve privacy

Only by improving the current state of protection of private and sensitive information can DeFi open the doors to a broad financial market in the real world. Of course, various solutions already exist and intensive work is being done on the development of others. For example, the cryptocurrency ZCash is aiming at protecting privacy, as well as the services of so-called cryptocurrency mixers - for example, Tornado Cash, MixerTombler and Onion Mixer.

Although these services provide a higher level of privacy protection, they also have problems to deal with. The main thing is that privacy protection almost completely eliminates the support of smart contracts , which are absolutely necessary for the operation of DeFi.

Traditional finances have various safeguards - such as futures, options and swaps. In their activities, they certainly do not want anyone on the chain to monitor their investment procedures. This could give their competitors a huge advantage. DeFi is clearly a unique industry, but it must continue to develop and modernize, especially in the area of privacy. However, we are not at all worried that the necessary solutions will not be developed in the end, so we can all look forward to much better financial services.

Slavomír is working in the field of cryptocurrencies since 2018. As a Co-Founder and Chief Marketing Officer of Dollero Technology, which is currently developing a crypto exchange ...

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