The decentralized financial industry undoubtedly has great potential: the locked value has exploded, topping $ 14 billion this month. Although there is speculation If decentralized finance is another bubble, I think the ecosystem will stay here. How it is maintained, however, depends on how DeFi deals with the problem continuous attacks and other vulnerabilities, How centralized finance includes the core functions of DeFi and vice versa.
DeFi encompasses everything that the crypto space fundamentally represents: democracy, power for non-banks and under-banks, transnationalism, a truly global and divided economy that many would consider a financial utopia.
However, There has never been a utopia, and no extreme can sustainably reach its ultimate goal without control. The terrible children stories tend to have an unfortunate ending if they are not adapted to the realities of a less utopian world. A golden mean between CeFi and DeFi must be achieved: both “factions” will benefit, as will the entire space.
What DeFi can take from CeFi
The lack of comprehensive and effective security reviews at DeFi has resulted in the loss of millions of dollars in hacks that are reputed to be damaging the entire space from the perspective of the world outside of cryptocurrencies where the CeFi-DeFi distinction is blurred. Within cryptocurrencies, DeFi has positioned this as enfant terribleAnd for good reason: Between code bugs, flash credit attacks, system vulnerability exploits, and token design issues, there were more than 20 major DeFi hacks worth more than $ 100 million in 2020.
Fortunately, in recent months the importance of better auditing and auditing in general has been increasingly recognized among major players in DeFi and their communities. This is the first step in the right direction.
Auditing for DeFi is, of course, as much an emerging profession as the industry itself, and while that means it’s not quite up to date, it also leaves plenty of room for change and improvement, maybe even for the development of a sub. – A whole new industry with standards and certifications to address this great individual weakness of DeFi. This security review model and best practices can be adopted directly from CeFi and adapted to the DeFi specifications.
The next step would be financial audits that address potential vulnerabilities from a market perspective. This would be a collaboration between traditional and digital finance, and CeFi players are leading the conversation.
With these topics covered, another DeFi challenge would be partially addressed: attracting institutional investment to ensure long-term development. While DeFi’s anonymity prevents large capital inflows by default, as institutional investors cannot enter into contractual obligations with an anonymous counterparty, increased security would facilitate a relationship between CeFi and DeFi in this direction.
A similar problem arises in retail, which is equally important for mass adoption. The complexity of most DeFi platforms makes them inaccessible due to the high level of technical knowledge required to use them. This limits the ability for DeFi platforms to expand their user base, which in turn makes a breakthrough in the mainstream world unlikely and diminishes their growth potential. CeFi products, on the other hand, enjoy a much higher acceptance rate due to their user friendliness and their proximity to conventional digital banking tools. These formats can be translated into DeFi protocols to improve user acquisition and retention.
Additionally, there are currently ways that DeFi is successfully introducing centralized components, and the fact that DeFi platforms have a significant portion of their assets stored in stablecoins, the products of centralized organizations, is perhaps the best example. As such, stable coins serve as an urgently needed bridge between DeFi and CeFi.
What DeFi CeFi can give
There’s a lot to admire about what DeFi has brought to the table this yearThis has, among other things, given non-banks the opportunity to gain access to banking services and provides the democratization that our entire space is striving for.
Although they are held responsible for most of the attacks, Flash loans are the definitive DeFi trademark as they are a great example of how finances can be effectively democratized. By allowing everyone to trade like a whale and take advantage of market situations that would otherwise not be available to them as smaller investors, they eliminate the phenomenon of the rich getting richer while the less rich stagnate due to their lack. Financial instruments or liquidity at the right time. With the increased security and user friendliness of CeFi, these possibilities can be expanded and presented to an entire market of potential users without bank details.
Some of the DeFi projects that collapsed this year are also having positive effects. The “right to fail” is an important part of the learning curve for an industry as young as ours, which makes us more resilient and even more fragile. This is in stark contrast to traditional finance, where mistakes big and small are eliminated thanks to the interventionist policies of governments and central banks. I think this is the fundamental flaw in the current financial system. Our space shows what real market forces are at, and DeFi, with its many hacks over the past year, has illustrated this perfectly. I admire people like Harvest, Value DeFi, and Yam for pointing out their mistakes. This shows that the entire crypto space is maturing and getting stronger in general.
As things stand today, DeFi is unlikely to hit the limits of its own niche in 2020 despite the steep rise. It will stabilize over the next year as some projects fail and disappear while others adapt and put in place self-regulatory mechanisms to give way to a more sustainable way of working that is better aligned with CeFi’s.
A combination of the ideals of DeFi, a system without high-level authorities in which the procedures are democratically and transparently agreed by the community, and the security measures and ease of use of CeFi, the mass adoption of cryptocurrencies will ultimately create a more equitable financial environment for z.
The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Antoni Trenchev is co-founder and managing partner of Nexo, a provider of instant credit lines. He studied finance law at King’s College London and the Humboldt University in Berlin. As a member of the Bulgarian Parliament, Trenchev campaigned for progressive legislation that would enable blockchain solutions for a wide variety of e-government services, in particular electronic voting and the storage of databases in a distributed ledger.