DeFi is in crisis. Decentralized finance is suffering the pangs of the fall of digital assets or the collapse of the Terra ecosystem. And because many cryptocurrency platforms are also struggling, with some near insolvency, critics are crying DeFi fail. It is described as a faulty system. The analyzes based on the cases of platforms based on a CeFi model, the conclusions are totally erroneous. DeFi, strongly anchored on decentralization and transparency, works very well.
Cyclical instability but structural reliability
For the past few months, the TVL (Total Value Locked) of most crypto platforms has dropped by 30%. On the whole market, the TVL literally dropped by 65% after the collapse of the Terra ecosystem. The total sum went from 170 billion dollars (month of April) to 60 billion dollars. At the same time, several cryptocurrency platforms are clearly in trouble. Celsius, a crypto lender with assets of around $20 billion, was for example forced to freeze withdrawals.
Crypto exchange FTX says it bailed out competitors Celsius, and BlockFi with a $250 million loan. And this, only shortly after saving the crypto broker Voyager Digital. DeFi companies may encounter difficulties. But this certainly does not call into question the reliability of the fundamental structure of decentralized finance. And in reality, these plummeting platforms are centralized financial institutions (CeFi).
Understanding the strength of DeFi and the weakness of CeFi models
The real strength of DeFi remains decentralization, possible thanks to blockchain, the underlying technology on which the system is based. Users do not go through a trusted third party for financial transactions. This eliminates the risk of fraud and corruption. Instead, transaction processing is decentralized to several thousand computers. In other words, investors do not trust a person but a code. Transactions are based on immutable smart contracts. Despite market pressure, this fundamental structure has never failed.
Some hope that this crisis highlights the real decentralized companies that hold their own. Because most crypto platforms that encounter solvency problems are built on a model of CeFi or centralized finance. This system works exactly like banks that fall under TradFi (traditional finance), except that CeFis use digital tokens. The idea of a declining DeFi often stems from a misunderstanding of decentralized finance, often conflated with CeFi.
DeFi and financial sovereignty
The first cryptocurrencies were initially developed to give users full control over their assets. The issuance and storage of digital assets was effectively decentralized. On the other hand, providing transparent and decentralized access to a broader set of financial products has become difficult, until the emergence of smart contracts and DeFi. Today, decentralized finance makes it possible to benefit from the basic products of the traditional market: payments, borrowings, loans, investments and insurance.
While providing these offerings to users, true decentralized finance companies allow them access to financial sovereignty. DeFi’s architecture allows you to maintain full control of your assets. With the TradFi, any financial transaction must go through an accredited institution such as a bank. It is there to confirm that the account exists and that the user follows the rules necessary to complete the transaction. DeFi changes this equation. This means that anyone can open an account and no entity can freeze funds or charge a fee for failing to meet a minimum balance.
The latest crash seen in the crypto markets has had a devastating effect on one of the most innovative and promising sectors in the cryptosphere, that of DeFi. Faced with what, the regulations is probably inevitable. The fall of Terra, moreover, could well precipitate the implementation of regulatory frameworks. Going forward, investors would only commit to products where processes and smart contracts are fully verifiable. And this, without the fundamental principle of DeFi ever being called into question.
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