CeFi and DeFi will finally meet in 2021 – Hope they get along
The decentralized finance industry undoubtedly has vast potential – locked up value exploded, overtaking $ 14 billion this month. Although there is speculation on if decentralized finance is yet another bubble, I believe he’s here to stay. How it stays, however, is another question that depends on how DeFi handles. current hacks and other vulnerabilities, how centralized finance integrates the main functionalities of DeFi and vice versa.
DeFi encompasses everything the the crypto space fundamentally represents: democracy, power to the unbanked and underbanked, transnationalism, a truly global and shared economy, which many would consider a financial utopia.
Yet no utopia has ever seen the light of day, and no extreme can sustainably progress towards its end goal without control. the terrible children in history usually come to an unhappy end unless they adjust to the realities of a less than utopian world. A happy medium between CeFi and DeFi must be struck – both “factions” should benefit, as should the whole space.
What DeFi Can Take From CeFi
A lack of comprehensive and effective security auditing in DeFi has led to millions of dollars lost due to hacks, which, seen through the lens of the world outside of crypto, where the CeFi-DeFi distinction is blurred, is damaging the reputation of the entire space. Within crypto, this has positioned DeFi a lot as a enfant terrible, and for good reason – among code bugs, flash loan attacks, system vulnerability exploits and token design issues, there were over 20 major DeFi hacks in 2020 worth over $ 100 million.
Fortunately, over the past few months, there has been a growing recognition of the importance of better auditing – and auditing in general – among the big DeFi players and their communities. This is the first step in the right direction.
Auditing for DeFi is, of course, just as nascent an activity as the industry itself, and while this means that it is not yet up to the task, it also leaves plenty of room for change and improvement. improvement – maybe even for the development of a whole new sub-industry, with standards and certifications, to address this biggest DeFi weakness. This security audit model and best practices can be taken directly from CeFi and adapted to incorporate the specifics of DeFi.
The next step would be financial audits, which would address potential vulnerabilities from a market perspective. It would be a collaborative effort between traditional finance and digital finance, and it’s something that CeFi players are leading the conversation in.
Once these issues are covered, another DeFi challenge would be partially met: attracting institutional investments to ensure long-term development. While DeFi’s anonymity, by default, inhibits large-scale capital inflows because institutional investors cannot contract bonds with an anonymous counterparty, better security would facilitate a relationship between CeFi and DeFi in this sense.
A similar problem arises on the retail side, which is just as important in driving mass adoption. The complexity of most DeFi platforms makes them inaccessible due to the high degree of technical knowledge required to use them. This limits the chances of DeFi platforms expanding their user base, making a mainstream breakthrough unlikely and stunting their growth potential. CeFi products, on the other hand, enjoy much higher adoption rates due to their user-friendliness and proximity to traditional digital banking tools. These formats can be transferred over DeFi protocols to improve user acquisition and retention.
Additionally, there are currently ways in which DeFi is successfully adopting centralized components, and the fact that a substantial amount of wealth on DeFi platforms is held in stablecoins – the products of centralized organizations – may be. -be the best example. As such, stable coins serve as an indispensable bridge between DeFi and CeFi.
What DeFi can bring to CeFi
There is a lot to admire about what DeFi has brought this year, including the fact that it presented opportunities for the unbanked to access banking services, offering the democratization that our entire space is aiming for.
Although blamed for most of the hacks, flash loans are DeFi’s hallmark in that they are a prime example of how finance can be effectively democratized. By allowing anyone to function like a whale and take advantage of market situations that would not otherwise be accessible to them as a smaller investor, they eliminate the phenomenon of the rich getting richer, while the less rich stagnate due to a lack of financial tools or liquidity at the appropriate times. Thanks to CeFi’s increased security and user-friendliness, these opportunities can be amplified and presented to a whole market of unbanked and under-banked potential users.
There are also some bright spots to be learned from some of the DeFi projects that fell apart this year. The “right to fail” is an important part of the learning process for an industry as young as ours which makes us more resilient, even anti-fragile. This is in stark contrast to traditional finance, where mistakes large and small are brushed aside 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 how real market forces play out, and DeFi, with its many hacks over the past year, has illustrated it perfectly. I admire the tastes of To harvest, DeFi value and Yam for reporting their mistakes. This shows that the entire crypto space, in general, is maturing and strengthening.
In the current state of DeFi, it is unlikely to cross the boundaries of its own niche despite the steep rise we have witnessed in 2020. It will level off in the coming year as some projects fail and disappear. , while others adapt and set in motion mechanisms to self-destruct. -regulate, leaving room for a more sustainable modus operandi that is better aligned with that of CeFi.
A combination of the ideals of DeFi – a system without vertical authorities where procedures are democratically and transparently accepted by the community – and the security measures and ease of use provided by CeFi will facilitate the mass adoption of cryptography and ultimately create a fairer financial environment.
The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Antoni Trentchev is the co-founder and managing partner of Nexo, a provider of instant crypto lines of credit. He studied financial law at King’s College London and Humboldt University in Berlin. As a member of the Bulgarian parliament, Trenchev advocated for progressive legislation to enable blockchain solutions for a variety of e-government services, including e-voting and database storage on a distributed ledger.