How decentralized is the decentralized world of crypto

Recent events in the digital asset industry have had a negative impact on user and investor sentiment and morale. The main reason for the fiasco we have seen over the past few weeks was the lack of transparency of centralized exchanges or CEX.

These organizations in question can be classified as CeFi products because even though they position themselves as Web3 companies, they operate centrally with some custody and control of user funds. There is little or no visibility on their structuring, governance and decision-making processes.

The aftermath has led many industry players to ask CEXs to provide proof of reserve of their funds to mitigate similar scenarios in the future. Since then, few exchanges have released a list of their wallets and assets to regain customer trust. However, we have yet to see an industry standard on how to make reserve proof more transparent, consistent, and reliable across the board.

A better approach for affected retail users would arguably be for them to revert to the first principles of blockchain technology – having custody of their own assets and having a trustless mechanism to verify assets, transactions and interactions on chain. The result that CEX are trying to achieve with proof publishing can be achieved in DeFi (decentralized finance) in an easy way using tools like blockchain explorers and open source code.

The industry is still in a nascent stage where adverse events like these can make a short-term dent and slow the pace of adoption. The way forward is to understand the long-term promise of the technology while properly managing the risks. This means diversifying assets across platforms, doing our own research before using or investing, and not making decisions that only focus on short-term gains in an unsustainable or high-risk way. That said, every person is different and each of us has different goals and objectives, so we all need to be aware of our decisions and seek relevant help and advice when needed.

Since the fall of Luna, 3AC (Three Arrows Capital) and later the failure of many large centralized lending platforms, what has come out is how some of the decentralized lending and borrowing platforms, decentralized exchanges and d other DeFi protocols worked as usual.

The debt that CeFi platforms owed to DeFi protocols had to be paid off first, as DeFi products governed by smart contracts worked as expected and would have liquidated positions had margin calls not been met.

After the fall of FTX, many in the crypto industry spoke out in favor of decentralization – not just as a narrative, but as a necessity for the long-term success of Web3. Most prominent industry leaders, from Brian Armstrong at Coinbase to Sandeep Nailwal at Polygon, have all emphasized the need to build better systems with DeFi and self-custodial wallets that don’t rely on trusted third parties or untrusted intermediaries. regulated.

DeFi products are often structured to be run as autonomous, decentralized organizations that are governed by the community. The community has full visibility into operational processes and functioning. They can democratically contribute to defining the vision of the product and more openly raise their concerns to a wider audience.

It’s a completely user-driven movement enabled by blockchain technology that helps build better, more inclusive digital products. Recent events have highlighted that Web3 technology enabled by new token mechanisms and incentive structures has the potential to disrupt many traditional financial entities. This is where decentralized finance or DeFi comes in and enhances auditability and accountability by the way DEX and DeFi protocols manage their capital and cash locked with publicly available smart contracts.

DeFi innovations make product experiences comparable (if not better) to centralized solutions. With increased scalability, lower transaction costs, improved liquidity and easy integration – DeFi products are on par with their centralized counterparts in meeting customer needs and ripe to build the future of more secure, efficient finance. and robust.

The author is India Lead, dYdX Foundation

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)