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By Matt Luongo
With centralized crypto exchanges under an ever-darkening cloud following the FTX implosion, some commentators have argued in favor of the “compromise” model that Binance CEO Changpeng Zhao – better known as CZ – has called CeDeFi.
CeDeFi, supporters say, couples the security, privacy and affordability of DeFi with CeFi’s greater liquidity and usability – not to mention the reassuring notion that someone else is flying the plane.
But here’s the thing: there is no such thing as half-decentralization.
For a DeFi protocol to be considered fully decentralized, it must be open-source and usable by anyone. All the underlying code and transaction data must be held on a blockchain and viewable by all. It must also be noncustodial, meaning that users, not a central party or parties, retain control of their assets and the passwords that protect them. Finally, it must be governed by smart contracts, not by individuals or organizations.
So the question we need to ask is: does CeDeFi offer the best of both worlds – or the worst?
The lesser of two evils?
CeDeFi, it must be said, improves upon pure CeFi in some respects.
Many CeDeFi projects offer greater transparency than their CeFi competitors – an advantage several have taken pains to stress in recent weeks.
In what is clearly an attempt to rebuild confidence and stem an outflow of liquidity, Binance has increased its transparency and this month launched Binance Mirror, an off-chain cold custody option for institutional investors.
This is a good thing. Investors should have control – of their assets and of their keys.
I’d love to see every CEX and CeDex (did I just coin a new term?) be more open about their assets and liabilities. As long as their statistics are accurate, this would be a major improvement over “black box” centralized exchanges. Any fraudulent activity would also ostensibly be visible on-chain. You can never make liabilities of a centralized system perfectly transparent, but this kind of openness would certainly help.
But these benefits only go so far – and the potential for manipulation is still significant. I’m open to the idea that someone someday will come up with a killer app only possible in CeDeFi, but I haven’t seen one yet. I also have yet to see a project that wouldn’t be better decentralized.
Not your keys…
CeDeFi outfits position themselves as portals into the DeFi space, helping users make sense of things and vetting the projects they offer. To appeal to skittish crypto newbies and institutional investors, they ape the look and feel of old-style bank websites.
But there’s no getting around another way these platforms are like banks: to access CeDeFi services, at some point users must hand control of their assets to a third party.
And there’s the rub: a system is only as decentralized as its most centralized element.
As the disastrous events of 2022 demonstrated repeatedly to the world, it is the centralized parts of a system that are most vulnerable to exploitation by the unscrupulous. The second there's a bank account that's filled with people's funds, you only have to knock down one door for the entire system to be at risk.
Borrowing DeFi’s halo
One thing that has been particularly frustrating for web3 builders is that much of the world now conflates CeFi and CeDeFi with DeFi. People have offered me condolences on the death of Bitcoin even though the demise of FTX had zero to do with either BTC or DeFi.
This misunderstanding is not helped by the fact that projects often blur the lines themselves, particularly now that the collapse of Alameda and FTX has actually proven the superiority of true decentralization. Desperate to distance themselves from CeFi, the surviving CeDeFi projects are starting to say – falsely – “Look how robust we are. We’re DeFi.”
One solution to this is for those of us in actual DeFi to use very precise language and do our best to connect and educate. Right now that only works in finance and crypto circles. It may take a more concerted effort to open the eyes of the wider public to the differences and lend them the courage to venture back into DeFi in large numbers.
Which is why I’m so focused on another solution, one that’s simpler to articulate and harder to execute: we need to build truly decentralized services that people use, like, and trust. If we do that, the rest will follow.
Final word: I am not naive enough to think that centralization in some form can be banished from DeFi tomorrow. But with technology advancing in leaps and bounds, we should be working toward that goal wherever we can. If we do, we will move closer to the day when financial power is finally where it belongs: with the individual.
Author Bio
Matt Luongo, Co-Founder of Threshold, a blockchain privacy service provider. He was recently featured in Bloomberg and interviewed by Unchained.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.