The Need for Smarter Wallets in DeFi to Avoid Overnight Losses

DeFi needs smarter wallets to prevent overnight losses

Opinion by: Brian Huang, co-founder of Glider

The cryptocurrency market operates 24/7, exposing users to continuous risks that current wallet designs fail to address. This article highlights the urgent need for smarter wallets equipped with automated protections to safeguard users’ assets, especially as more financial instruments transition onto blockchain platforms.

Key Takeaways

Traditional crypto wallets are passive and require constant user input, making them inadequate for the 24/7 market environment.
The collapse of Terra’s UST in 2022 exemplified how a lack of automated protection can lead to significant losses for users.
Traditional finance (TradFi) has built-in automation that protects investors, which is a crucial element that DeFi wallets currently lack.
For DeFi to thrive and reach a larger audience, wallets need enhanced automation capabilities to manage risks effectively.
Smart wallets should be designed to operate autonomously, thereby reducing the burden on users and enhancing their confidence in investing.

Current State of Crypto Wallets

Crypto wallets today act like passive vaults. Unlike smart devices that can adjust to a user's needs, most wallets in the crypto space require constant manual interaction. This dependence on user input is not suitable given the non-stop nature of the market.

To illustrate this issue, consider the collapse of Terra’s UST in 2022, where the stablecoin's value fell approximately 5% in just four hours, ultimately losing nearly all its value within three days. For users in Asia who held UST in self-managed wallets, they faced a staggering 30% loss overnight. The absence of automatic protections meant there was no way to auto-sell, leading many crypto enthusiasts to lose their life savings. Smarter wallets could have potentially prevented such devastating losses.

While market volatility remains, DeFi tools are predominantly reactive and lack preventative features. Without built-in safety mechanisms for situations when users are offline or sleeping, investors find themselves in a state of perpetual alertness.

This challenge lies not just in the user experience but in a fundamental inefficiency in traditional wallet design. Until wallets can execute predefined strategies and handle basic risks autonomously, they will remain tools predominantly used by seasoned investors, rather than welcoming options for the average user.

The Automation Advantage in TradFi

In contrast, traditional finance systems incorporate various automated protections, such as stop-loss orders and scheduled rebalancing of portfolios. These features allow for automatic adjustments to risk levels in response to market fluctuations, significantly reducing the need for human oversight.

Related: Are crypto wallets becoming the control centers of our digital lives?

These protections are embedded within TradFi’s infrastructure, granting investors more freedom to disengage when necessary. While some DeFi proponents argue for prioritizing user control, it is essential to recognize that without automation, control can easily become a burden rather than an asset.

Investment tools like robo-advisors or passive index strategies allow retail investors to benefit without needing to understand every detail of the underlying mechanisms. People trust that their money is effectively managed even if they do not grasp the intricacies.

The Call for Smarter DeFi Solutions

For DeFi to advance and play a significant role in our financial ecosystem, wallets must evolve to become proactive partners in managing investments. They need to automatically protect user positions, find rebalancing opportunities, and reallocate resources even while users are resting.

These features should be designed to avert liquidation and respond aptly to market changes, enabling users to invest with greater certainty. Ultimately, investors seek assurance that their financial objectives will be met in a smart and efficient manner.

Imagine a world where you can set your thermostat or automate bill payments with ease — smart DeFi should provide that same level of reliability for your wallet. The ability to step away from your screen while trusting the system is vital for DeFi's growth beyond a niche market.

While critics may express concern that introducing automation — such as smart agents or rule-based executions — might reintroduce centralized risks or complicate transparency, it's important to understand that automation isn’t synonymous with losing control. Instead, it can enhance user autonomy. As in traditional finance, users can establish their investment parameters and modify them at any time while maintaining full transparency.

Smart automation can strengthen the principle of sovereignty in DeFi, as a wallet that ensures your safety around the clock remains decentralized; it merely becomes more user-centric.

The Bottom Line

If autopilot technology can safely manage your vehicle without your constant involvement, your wallet should be capable of managing your portfolio without requiring your continual focus.

Every sector of technology has adopted intelligent automation; it's time for the crypto industry to follow suit and provide what users truly need for their success. The future wave of crypto adoption will not be driven by sleepless traders but by systems that empower investors to pursue their goals with greater confidence.

Opinion by: Brian Huang, co-founder of Glider.