Common Issues in DeFi

Issues in DeFi

• While DeFi solves many issues TradFi is having, this doesn’t mean DeFi itself is without issues. DeFi is still a relatively new technology, which means there are still many issues it has that users need to deal with. These are some of the most common issues in DeFi and some suggestions on how you can solve these issues

1. Impermanent Loss when Yield Farming in AMM

• Impermanent loss happens when the deposited token’s value changes in any direction. It is called impermanent because the token’s value can go back to the way it was. Since the tokens are deposited in AMM with their own price, sometimes you might make less profit than when the tokens are being held when their market price changes.
• Impermanent loss is calculated by taking the difference between the token values locked in AMM and the token values if they were not invested.
• Below is an illustration of how to calculate impermanent loss assuming there is no transaction fee + other rewards.

• One way to prevent impermanent loss is by choosing a token pair that is relatively stable because they usually have a minimum movement. For example, stablecoins (USDC-USDT).

2. Gas Fees

• Gas is a fee that needs to be paid to conduct a transaction on a blockchain. Gas fee rises together with the rise in complexity of a smart contract and blockchain traffic. Gas fees are used to pay miners who provide the processing power to execute the smart contract and update the state of the blockchain.
• Some ways to decrease gas fees are to transact in less busy time which you can find from gas fee tracker websites like Blocknative or Nansen, use fewer wallets, use centralized exchange services such as BNB, and consider using L2 services such as Lightning Network or ZK Rollup.

3. Comparing Yield

• Comparing yield in yield farming is usually done by manually accessing and comparing yield from different protocols. By comparing each of them, you can find which protocol is the most profitable for yield farming. This way of comparing is inefficient, since you will need to access each protocol individually to get the data for comparison.
• One of the solutions to this problem is by using DeFi aggregators, which gather data from different protocols in one place and make it easy to compare the yields, like Defi Llama for example.
  

4. Monitoring Investment

• In DeFi, it is also hard to monitor all of your investments. Since you will invest in many places and many forms, it will be hard to track all of them at the same time. While if you try to track them one by one, it will consume more time and effort.
• The solution for this issue is DeFi dashboards, which will track and show your DeFi portfolio value from various platforms in one place, like Zapper.fi or Apeboard for example.