To the outside observer, if an application uses digital assets, that is part of “crypto”. That is, there is no distinction between the now bankrupt FTX and on-chain exchanges like Uniswap and Curve Finance, for example. But for those more connected to the industry, the difference between exchanges like FTX and decentralized exchanges is crucial. It’s the difference between CeFi, apps that take custody of users’ digital assets, and DeFi, protocols that users interact with while keeping control of their tokens.
Scrutiny in CeFi
On a practical level, interacting with established DeFi protocols, as opposed to CeFi platforms, makes it much less likely that a malefactor could embezzle funds. After the collapse of FTX, it seems, any and all centralized players in the industry came under scrutiny. Meanwhile, market participants were calling for audits to determine whether companies actually had the assets they claimed to have. While the FTX implosion may be the main one in terms of CeFi failures, there were many more in 2022. And many times these instances were preceded by the dreaded phrase “paralyzed withdrawals”. Meanwhile, companies struggled to figure out ways to recover their customers’ assets. BlockFi, a centralized crypto lending company, paused withdrawals in November. Then Genesis Global Capital, Genesis Trading’s lending arm, did the same. Celsius, another lending company that offered yields on user deposits, collapsed in July. About a week later, Voyager, a digital asset brokerage, followed suit when Three Arrows Capital, the now bankrupt hedge fund, defaulted on a $658 million loan. These failures to protect user assets contrasted with DeFi protocols which, for the most part, went solvent while adapting to changing market conditions.
Rallying Cry for the DeFi Industry
The contrast between the two systems, which look so similar to people with little familiarity with crypto, has become a rallying cry in 2022 for those into DeFi. Furthermore, the importance of differentiating FTX’s bad actors from the DeFi ethos has reached Capitol Hill. Minnesota Congressman Tom Emmer, for example, has defended permissionless funding. According to Emmer, individuals with concentrated and unsupervised power, such as John Ray, the lawyer responsible for the FTX bankruptcy, characterize that there are people responsible for companies, which cryptocurrencies seek to avoid. “This is the exact problem that open and permissionless technology like crypto and blockchain solves,” he said at the FTX hearing. It is worth noting that maintaining self-custody of your assets does not guarantee security when operating in DeFi. After all, there are smart contract bugs to worry about, as well as poorly designed solutions that can be exploited. For example, any user who protected his assets in his own self-custody wallets would not have been able to save himself from the collapse of Terra (LUNA), resulting from an unsustainable economic project. Still, while 2022 was a very brutal year across markets, crypto and beyond, it was a very cruel time for centralized crypto players. In contrast, DeFi and the “not your keys, not your coins” movement seem to be maturing a little more gracefully. *Translation of article DeFi To Widen Gap With CeFi After Stormy Year with permission from The Defiant
Notice: The text presented in this column does not necessarily reflect the opinion of CriptoFácil. Also read: Bitcoin may not break highs in the next halving cycle; understand Read also: Crypto thefts in 2022 exceed R$ 15 billion; remember the biggest hacks Read also: China should launch its own NFT market in January
