#1 Myth in Web3 — DeFi is Decentralized

By akohad Apr7,2023

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Yes, you read that right… Decentralized Finance is a myth.

It is actually the complete opposite of what the name indicates, it’s Centralized.

This happens when we assume that everything that is built with Blockchain technology automatically is a trustless system but

-What about the owners of the DeFi protocols & smart contracts?

-What about cryptocurrencies like USDC that are the backbone of DeFi but are completely dependent on FIAT and traditional finance?

-What about Web2 infrastructure like AWS that power nodes & entire blockchain networks?

-What about CEXs that are the ones that even allow us to obtain crypto?

“A chain is only as strong as its weakest link”

DeFi implies decentralization and trustlessness at every level, so even one centralized component compromises the whole protocol.

Let me paint a clear picture –

DeFi is built on USDC liquidity and if USDC is backed by cash held in banks except… banks don’t actually hold that cash (cough cough… SVB) then…

This could suppose a complete failure of the DeFi Ecosystem.
This almost happened recently but the federal reserve stepped in.

SVB Collapsed which led to other banks collapsing which led to uncertainty around the $ which led to USDC depegging from 1$ which led to various DeFi ecosystems collapsing.

Do you see how a centralized component can completely destroy “De”Fi?

The crypto industry has gone full circle, going from not trusting the traditional financial system to relying on it for stability and regulatory calm to now after SVB not trusting banks again?

It is outright delusional to think that we currently have a decentralized utopia.

The Stablecoin Showdown

You might be thinking, well let’s just scratch USDC and pick another stablecoin, right? Let me break down the leading alternatives.

USDT
Well, well, well… while Tether is at the top of the market when it comes to stablecoins it is just not as popular for serious use cases. This is because of its reserves — It’s a bit of a mystery, as the company has been dodging requests to reveal the assets that back its stablecoin repeatedly, sketchy huh?

BUSD
The token has been dodging regulatory bullets since February when the New York Department of Financial Services questioned its legality and even told Paxos to hold its horses on minting.

DAI & FRAX
Both of these stablecoins are backed by other assets to maintain their value, the issue? Well, these assets are other cryptocurrencies including, the one & only, USDC! We are just going in circles back to the same problem.

UST (Terra)
Yeah… this one didn’t work out so well. Let’s stay away from algorithmic stablecoins for now.

Where do we go from here?

The first step is to make to consciously accept that DeFi is actually “on-chain finance”.

*It’s naive of me to think that the term will start trending & overtake DeFi but hey… let’s give it a try.

With this step completed, we must now think about what is the use of Blockchain in Finance then, if not decentralization?

This brings me to the second biggest point that must be stressed, we must not build mindlessly with Blockchain technology and apply it to all existing platforms to see what fits, NO!

We should tackle real-world problems, and if Blockchain is the absolute best way solution to a problem, then by all means let’s implement it.

It can offer the transparency, traceability, and ownership of funds that are so desperately needed nowadays with Banks having the power to strip us of our money.

Remember, those that remain in the Decentralized fairy tale are the ones that get burned, whereas those who understand the system are the ones that use DeFi to its fullest potential and find great opportunities.

Will you be the first to build a truly decentralized system?
Will you be the one to build the stablecoin of the future?
Will you be the one that builds a suite of Dapps that bridges the gap between “on-chain finance” and traditional finance?

The possibilities are endless.

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By akohad

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