What problems prevent mass adoption of cryptocurrencies and how to solve them

Complicated user experience

While it is slightly longer and more complicated to open a bank account than it is to create a cryptocurrency wallet, there are many nuances that a novice user who decides to enter the realm of cryptocurrencies will have to deal with.

It is easy to understand how to write and save a seed phrase or receive and send funds, but other functions of wallets and decentralized protocols can cause difficulties even for experienced users.

If you need to exchange, for example, euro for dollars, you simply go to the bank's mobile app and convert the currency; then you can transfer or spend it. But with cryptocurrency, it's not so simple. Let's say you want to buy a USDT token with fiat. Here's what the user will have to go through:

• First, you have to register an exchange account and most likely go through identity verification (KYC);
• Fund the account in fiat currency and convert it to USDT on the exchange;
• Withdraw USDT to his wallet while not making a mistake in choosing a network. In case of an error, the user risks losing his funds.

The more complex the system, the more likely you will make a mistake that could have irreversible consequences. Developers strive to simplify their products' functionality and improve the user experience, but many still have work to do.

High transaction fees

The bandwidth of first-generation blockchains like Bitcoin and Ethereum is very low. This all leads to high transaction costs and high latency in their execution. The cost of commissions on these networks can reach $6 — $10 or even more under high load.

Such amounts seem insignificant for users who make thousands of dollars in transactions. However, such commissions will be significant if you regularly transfer or spend small amounts of money.

This problem is being addressed by next-generation blockchains and layer 2 networks that allow for cheaper transactions at high speeds. These include:

• Avalanche,
• Cosmos,
• Solana,
• Polygon,
• Arbitrum,
• Optimism.

Security threats

If, in the case of banks, it is possible to insure your funds somehow, then in the crypto environment, users are left to themselves, and there are no practical protection tools.

Here are the threats that arise when actively using cryptocurrencies:

• Loss or theft of a seed phrase/private wallet key. Phishing is the most common — spreading fake websites and emails to steal private data;
• Hacking of decentralized or DeFi protocols: DEX exchanges, credit platforms, cross-chain bridges or NFT marketplaces. Hacks in the DeFi environment happen very often due to vulnerabilities discovered in the protocols' smart contracts;
• Infection of the user's device with malware that can gain access to sensitive information. Windows and Android users are most vulnerable to such attacks;
• Scam or fraud by the project team. It is not uncommon for attackers to intentionally leave backdoors in the code to rug-pull, i.e. to quickly withdraw users' liquidity.

Even extensive protocols such as Aave are hacked. To avoid falling victim to hacker attacks or scammers, you need to learn basic security skills:

• Learn to recognise scam and phishing;
• Learn smart contract audits;
• Be very careful when using decentralized protocols and signing wallet transactions;
• Follow security rules: use separate wallets, revoke smart contracts' permissions to spend funds (upruvals), etc.

Developers offer solutions that help to protect users from various attacks. For example, MetaMask has a built-in anti-phishing plugin, and recently, the wallet has integrated a function to detect suspicious transactions and warn users about them right in the interface. However, one cannot rely 100% on ready-made solutions and develop competencies independently.

The developers are also exploring alternative solutions to protect against protocol attacks, such as implementing the Killswitch function and controlling certain transactions. In the first case, the team will be able to suspend a smart contract to prevent an attacker from withdrawing funds, and in the second case — to require separate confirmation for particularly large transactions.

High volatility and many other risks

In addition to security threats, other risks are associated with capital loss. Cryptocurrencies are highly volatile, meaning their value can change significantly in a short time.

Moreover, security threats are directly related to volatility risks. If, for example, someone manages to hack the DeFi protocol, their token could become worthless. There have been cases where, after the protocol was hacked, the value of its native token collapsed by more than 99% in hours or even minutes.

An incident with one project can affect others — even entire ecosystems. Take the Terra collapse as an example: UST and LUNA tokens collapsed to almost zero due to a team error and the withdrawal of a large sum from the Anchor protocol.

However, the incident also affected other projects, such as the DEX exchange Osmosis, which had significant liquidity in UST algorithmic stablecoins. Due to a large amount of liquidity withdrawal, the native token OSMO also collapsed.

The collapse of the FTX exchange also negatively impacted the exchange rate of FTT's token and many other projects, especially those in which the company had invested. FTX still has not fully honoured its obligations to the affected users.

One possible solution is to create an insurance fund to pay out to users affected by hacks and crashes. Large projects often compensate for losses, but so far, not all of them.

Exchanges also protect against volatility:

• stop losses,
• hedging instruments,
• deposits in stablecoins.

However, many such instruments require a certain level of skill. One of the simplest and most effective means of protecting traders from volatility is diversification. For example, you can keep one part of your funds in bitcoin and altcoins and another in stablecoins. You can also allocate funds in a portfolio between cryptocurrencies and traditional assets such as stocks, bonds, gold and currencies.

Legal Uncertainty

Although the status of cryptocurrencies in many developed countries has already been defined, the legal framework has not yet been fully developed, which may stop some citizens from investing in these assets.

Some users are afraid of possible legal consequences, but this problem can only be solved by adopting specific laws establishing rules for working with cryptocurrencies and projects, taxation regimes and so on.