Bankless: DeFi is eating the world but users are not hungry

In a classic 2005 essay, free marketism and Nobel laureate in economics James Buchanan argued that the predatory growth of nation-states was largely driven not only by opportunistic politicians, but also by citizen evasion. Driven by the desire for personal responsibility.  

Politicians are empowered because freedom comes with more responsibility, and people fear freedom because of it , Buchanan writes . They would rather embrace the “cocoon-like protection” that regulates the state, entrusting the personal responsibility of civic life to a central guardian who bandages our wounds when we fall, rather than facing the spontaneous dictates and unpredictability of a free-market economy.

This is not a unique observation.

Almost two centuries ago, French political scientist Alexis de Tocqueville made a similar observation as he left the French monarchy for the newly formed American republic. Tocqueville marveled at the new republic, but worried that the cost of democratic self-government might be prohibitively high. He believes this could lead to a trend in which citizens hand more and more freedoms to a paternalistic, overbearing government.

In his 1835 masterpiece, Democracy in America, he wrote:

“The will of man is not broken, but softened, bent, and directed: men are seldom compelled by it to act, but they are constantly restrained; such a power is not to destroy, but to prevent existence; it is not tyranny , but to compress, deprive, exterminate and confuse a nation until each nation is reduced to nothing but a herd of cowardly and industrious animals, of which the government is their shepherd.”

In many ways, this is similar to the biggest weakness in crypto today. It’s a stateless system that requires autonomy, but it’s hard to imagine how much interest most users in the crypto space today are interested in decentralization, or having the self-discipline that decentralization requires.

Decentralization means self-management

The raison d’être of DeFi is the democratization of the financial world. Thanks to the internet and smart contracts, DeFi eliminates or reduces the influence of central entities (governments, corporations, or even worse, a combination of the two) on the banking industry. Think back to the Great Recession of 2007-08, the combination of the two had devastating effects.

Decentralization is desirable because it makes it difficult for organized groups to collude and manipulate the rules in their favor, it is not a public good. DeFi promises to create a permissionless financial world where ordinary users are empowered to pursue their financial freedom.

However, a stateless financial system does not equate to zero governance. This is an important point worth reiterating twenty times. A common misconception is that no government is synonymous with no governance.

Many things in everyday life are regulated by bottom-up spontaneous order and self-monitoring mechanisms arising from collective action, ranging from small things like social norms regulating workplace behavior to overseeing the public communities in which we live. informal rules.

Economist Elinor Ostrom, who won the Nobel Prize for her extensive empirical work, details the self-governance of citizens in forests, offshore fisheries, irrigation systems and policing systems without central intervention. Numerous peer-reviewed social science studies have shown that even in the most unstable social settings, such as underworld prisons, impoverished authoritarian nation-states, and the 17th-century Amsterdam stock market, efficient self-government has a way to emerge.

DeFi is no exception. The absence of political regulations simply means that self-governance will be more of a self-responsibility. Rather than trusting politicians or centralized parties to regulate DeFi, it is a self-custodial responsibility that we choose to assume and develop.

Contrary to popular belief, DeFi is already full of mechanisms for self-regulation. These rules and self-adopting policies constrain shirking and guard against predatory behavior:

  • The most common is the capital over-collateralization model used in staking and yield farming to discourage debt accumulation.
  • Another is the ubiquitous use of protocol tokens as a form of voting on protocol changes.
  • Despite the lack of financial laws, many blue-chip DeFi protocols like Compound, Uniswap or MakerDAO are willing to submit their smart contract code for audit.
  • DeFi also provides insurance against smart contract hackers. Agreements in this submarket include Armor and Nexus Mutual, which have a TVL of $1.3 billion as of December 2021.

Mainstream media will continue to portray DeFi as the “Wild West of Finance.” But reality is far less turbulent or lawless than the metaphors suggest.

Self-discipline is universal.

Get used to centralized solutions

While formal rules and mechanisms will play an important role, it constitutes only half of the governance puzzle. As pointed out by Buchanan and Tocqueville, the system can only be self-sustaining if the users themselves are willing to participate in self-governance.

The indifference to decentralization is clearly visible. The best example of this can be seen in DeFi’s attraction to centralized platforms and solutions.

Taking the third largest blockchain, Binance Smart Chain (BSC) as an example, its validator network has a total of 21 validators, compared with tens of thousands and hundreds of thousands of validator nodes on blockchains such as Bitcoin and Ethereum, very few.

Bankless: DeFi is eating the world, but users are not hungry

To become a validator on BSC requires a sky-high prepaid deposit of 519,000 BNB ($277 million), compared to 32 ETH (~$80,000) on Ethereum 2.0 and 2,000 AVAX ($136,000) on Avalanche USD), not to mention decentralized staking pools like Rocket Pool, which cost less.

Additionally, its native token, BNB, is also one of the least publicly issued tokens, with 50% allocated to insiders.

From a decentralization perspective, these are proper “red flags” (red flags).

Bankless: DeFi is eating the world, but users are not hungry

However, the fact that the BSC network is relatively centralized does not affect most of its users. The network has a TVL of $16 billion as of December 2021, and the influx of users continues to grow in numbers.

Bankless: DeFi is eating the world, but users are not hungry

The appeal of BSC is easy to understand. Because centralization allows for short-term scalability, users can avoid the high gas fees required for decentralized node verification. In the blockchain gaming space, users often mint and trade NFT assets in-game, and a Dappradar report found that BSC leads all other smart contracts Layer-1 with an average of over 750,000 unique users per day in July .

The trend towards centralization is also evident elsewhere. Take the wildly successful blockchain game Axie Infinity, for example. To accommodate its explosive growth in June, it introduced a centralized Ronin sidechain for scalability within the same month.

Bankless: DeFi is eating the world, but users are not hungry

As a business decision, it proved to be ingenious and very lucrative. But from a cryptographic ideal standpoint, this is problematic. Centralized escrow bridges like Ronin employ a “trusted” model, which basically means that players don’t rely on decentralized verification of their transactions, but on their reputation and the integrity of their developers. Axie players sacrifice safety for short-term efficiency.

However, if developers have the power to delete or modify players’ hard-earned assets, then game revenue (P2E) is no longer game revenue, but play-to-hopefully-earn. It just takes us back to the traditional gaming world, where the big developer studios have too much control over how their in-game economies should work. Immutable economic ownership of their games should be even more important when we consider that the majority of Axie players rely on the game as a respite from the economic disruption of COVID-19.

Axie Infinity is not alone. Many other cross-chain solutions, such as BitGo’s “Wrapped Bitcoin” (WBTC), have gone down the same tricky path to centralization, as the wrapped asset is fundamentally managed by a centralized entity that oversees the asset Gateways and rules that are locked and minted. As of December 19, 2021, approximately 259,000 bitcoins ($12.2 billion) were held by BitGo.

When asked on the Messari mainnet panel about the future of multichain, Terra co-founder and CEO Do Kwon joked that users trust him and he “might not steal Terra’s connection to Ethereum’s Shuttl bridge. $1 billion”. (To his credit, Kwon also admits that this solution is too centralized to stand the test of time).

Balancing safety and cost

These are just a few examples of severe centralization, but there are many more threatening the future of cryptocurrencies and the potential of DeFi. Perhaps ironically, there are so many successful centralized solutions in a world that claims “decentralization” as its biggest selling point.

Why does centralization succeed in a space where decentralization is considered its core value? The most straightforward explanation is that users don’t care. Maybe users do care, but they don’t care enough to sacrifice cost/efficiency/economic benefits.

Users forget that Ethereum’s gas fees are just a realistic price to pay as an alternative to the existing centralized financial system that can afford to give us “free” transaction fees because it has achieved economies of scale.

We leverage blockchain products to dress and market in the language of decentralization, immutability, and user ownership. But fake marketing masks the institutional reality that these products are centralized.

Messari analyst Ryan Watkins aptly put it: “Every cycle people are blinded by the latest centralized solutions to all blockchain problems.”

The crypto space faces a tension between the long-standing philosophical ideals of DeFi and the practical use of DeFi here and now. Technology and developers are rapidly moving towards a decentralized world, but user needs and mainstream culture are still too accustomed to the speed and convenience that centralization brings.

Software may be eating the world, but users are not hungry. This is a problem that the encryption field has to face, sooner rather than later.

Bankless: DeFi is eating the world, but users are not hungry

With each high-profile protocol hack, the arm of the state finds more and more reasons to reach out to DeFi.

And how long until DeFi stretches its arms back?

Bankless: DeFi is eating the world, but users are not hungry

Implications and Conclusions

It’s hard to blame centralized crypto products.

After all, companies are simply responding to users’ needs. If users don’t need them, they cease to exist. CeFi will inevitably play some role until we reach the nirvana of non-custodial, fully trustless transactions and immutable assets, and the DeFi landscape will resemble an archipelago of CeFi, DeFi or CeDeFi solutions.

Then what?

We must not forget that decentralization is the crux of the whole issue.

There have been many great societies in history that turned catastrophically when they made short-term trade-offs for their own benefit. The road to decentralization is not easy, and it shouldn’t be easy either. It will be met with backlash from rent seekers who exploit the indifference of ordinary users in an attempt to keep their share of centralized profits. As long as users are not interested in self-governance, they will continue to fall victim to protocol hacks, rug pulls, exploitation, and continued unrest from predators.

That’s not necessarily a bad thing from a free market perspective. Attacks expose flaws, disrupt complacency, stimulate trial-and-error discovery, and lead to new knowledge. That’s why banks pay white hat hackers millions of dollars every year. Mistakes and failures are just the price of innovation and progress.

The cryptocurrency community that cares about decentralization needs to support and empower the developers who are pushing these frontiers. In exchange for packaged Bitcoin products that rely on centralized custodians, we should support protocols and developers like renBTC that have decentralized networks. Instead of centralized stablecoins, we should leverage decentralized stablecoins like Dai and Frax as much as possible.

Artists and developers need to rethink the merits of decentralized platforms like Genie, NFTX, or Rarible, rather than centralized NFT marketplaces powered by FTX or Coinbase. Users in their own DAOs must be hyper-sensitive to trends in centralization, such as their native tokens may be distributed.

It’s going to get tougher before it gets better, and the crypto space needs a lot of user education.

Most users jumping on the cryptocurrency bandwagon are attracted by high yields first and security second. The lessons of decentralization and the dangers of centralization must be reiterated for newcomers and a reminder to ourselves. After all, going against the ideal of decentralization will only defeat the whole point of DeFi.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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