Centralized financial institutions thunder but DeFi is not dead

“Cryptocurrencies have been plunging… Chaos has spread to DeFi: Celsius, a cryptocurrency lender with about $20 billion in assets, was recently forced to suspend withdrawals. Last week, cryptocurrency exchange FTX said it was in rescue Shortly after buying cryptocurrency brokerage Voyager Digital, it is bailout BlockFi, a struggling crypto lending platform, with a $250 million loan.”

— Jon Sindreu, The Wall Street Journal, June 30, 2022

The Wall Street Journal story is filled with condemnation of the so-called DeFi failure. 

Pantera Capital: Centralized financial institutions are thundering, but DeFi is not dead

DeFi – Decentralized Finance, Has It Really Failed?

This is a huge misunderstanding, it didn’t fail, it worked!

The five companies listed by the reporter in this report are all centralized, they are just old-fashioned venture-backed startups, not DeFi at all, and not on the blockchain. These businesses are just over-leveraged start-up banking entities, and in fact the failure of this type of business is a cliché and there is nothing new at all.

Decentralized finance protocols — like Aave, Compound, Uniswap, MakerDAO — all work flawlessly 24×7. This crisis just proves that DeFi works very well, much better than centralized financial companies such as Celsius, BlockFi, Lehman Brothers.

First of all, I try to avoid getting myself to read this kind of report citing the “Tulip Bubble” reporter, I have not read anything useful in this kind of article that casually cites cases from four hundred years ago. However, it is because I am such a strong proponent of blockchain that I dutifully bite the bullet and read the entire article.

Let’s analyze the misconceptions contained in the article:

1. “Remember how the banking system self-destructed every few decades? Now imagine if banks only lent money to other banks, you might think of the concept of house of cards, “decentralized finance” or “DeFi”.”

You don’t need to remember what the report said, it’s wrong again! Celsius, BlockFi, Voyager Digital are all banking entities, they are not decentralized in any way.

Those startups are just banks that take short-term deposits and make long-term loans to each other and others, a 20-to-1 leveraged business model run by ordinary people.

On the other hand, DeFi is not an empty house of cards. Its foundation is rock solid and completely sheer. DeFi removes human subjectivity in funding decisions. Parties agreeing to transact openly and transparently on the blockchain, rather than behind the scenes by opaque, artificial, potentially conflicting financial actors, is a vision we should strive to achieve rather than insist on inefficient Centralized financial system.

The author holds a misleading view of earnings in the blockchain. He ignores that DeFi is the financial backbone of the entire blockchain ecosystem, and DeFi is used to power all forms of transactions – retail, institutional, and even the type of green loans he claims don’t exist on blockchain. Collateralized loans that secure the blockchain and incentivize liquidity to prevent slippage are just some of the ways that yields are generated in cryptocurrencies today.

2. “To the delight of critics, DeFi ended up committing the same crimes as Wall Street, essentially becoming a vehicle for a new generation to engage in the rampant speculation typical of pre-2008 investment bankers.”

Oh ~ so banking evil should have stopped in 2008? Hmm… I’m not sure the documentation supports this. Banks have paid a staggering $321 billion in fines since they were redeemed by U.S. taxpayers in 2009.

I remember an anti-Bitcoinist writing an article “Bitcoin is Evil”. I don’t understand why, Bitcoin is a piece of open source code that anyone can use. It has never done anything bad to anyone. Banks, on the other hand, have already been convicted of $321 billion worth of nefarious acts. (And, that’s just the ones they’ve been caught doing).

To put this figure into perspective: the United Nations’ food aid arm, the World Food Programme, estimates that $6.6 billion will help prevent 42 million people from starvation in 43 countries.

Banks spend 50 times more money on fines than they do to solve world hunger, maybe this article should be “Banks are evil”.

For another comparison, the fines imposed by banks are equivalent to the combined GDP of 84 countries. If the banks didn’t commit crime, they could provide a full year’s wages to all 363 million citizens of these 84 countries.

DeFi has never “committed a crime”, and the rules of engagement have been codified into smart contracts. You don’t need to trust counterparties who may be incentivized to distort the truth, and you don’t need to rely on trust for financial transactions. The code just does what the parties agree to.

3. “Crypto lenders’ exclusive focus on other crypto projects suggests their problems are much worse than a Lehman-style liquidity crisis.”

No… Celsius, BlockFi, Voyager are centralized finance just like Lehman Brothers.

4. “Digital currencies like Bitcoin are too inconvenient to deliver on the promise of an eventual concentration of funds in a handful of banks, asset managers and governments.”

Why would a journalist — and here I like to borrow Mark Anderson’s classic line — “who can’t have 12,000 followers” think 300 million people are wrong? 300 million people see the promise of blockchain. If a reactionary who completely misunderstands the fundamentals doesn’t see the promise of blockchain, that’s not my problem.

However, I am a real athlete. I tried my best to help this young furry boy get out of his misunderstanding.

Pantera Capital: Centralized financial institutions are thundering, but DeFi is not dead

To quote Cool Hand Luke (starring Paul Newman, 1967), “There are some men you just can’t touch.”

DeFi is better

The most elegant proof of DeFi’s superiority over centralized finance/banking is head-to-head competition. Centralized finance companies like Celsius and BlockFi do business with counterparties, then they invest their funds in DeFi protocols, what happened?

Smart contracts force centralized financial firms to pay back DeFi protocols. 

In fact, you could say DeFi, thanks to its over-collateralization discipline, protects you from CeFi. Celsius was forced to prioritize over $400 million in DeFi loans on Maker, Aave, and Compound to prevent its collateral from being liquidated. In DeFi, participants have no ability to violate smart contracts, “transaction is transaction” – you can’t quit. 

All centralized finance companies are forced to repay DeFi protocols by smart contracts. On the other hand, centralized financial firms can deceive their clients and then hide their clients. 

For example, even Voyager explicitly advertises that its customers’ deposits are FDIC-guaranteed — and the FDIC apparently only guarantees failed member banks. They certainly won’t bail out bank customers like Voyager’s lost business.

“In the rare event that your USD funds are compromised due to the failure of the company or our banking partners, you will be fully compensated (up to $250,000).” – Voyager website, 2019 

“Your dollars are held by our banking partner, Metropolitan Commercial Bank, which is FDIC-insured, so your cash with Voyager is protected.” — Still on Voyager website, July 11, 2022

Failing centralized finance firms are silent about their clients, who unfortunately are unlikely to get their money back.

DeFi will never, customers can monitor the protocol on the blockchain and determine execution by code. Centralized finance clients have only vague websites to trust.


DeFi protocols performed best among the large leading cryptocurrency lenders (Aave, Compound, BlockFi, and Celsius) launched in 2017. BlockFi was largely bailed out by FTX, a deal that offered a $400 million line of credit and an option to buy the company at a 93% discount to the high water mark observed in the private market. Celsius was at one point managing $24 billion in assets, roughly equivalent to Point72, one of the most famous hedge funds founded by Steven Cohen in 2014 with 30 years of investing experience, Celsius is now facing potential bankruptcy.

So how is DeFi more effective than CeFi in the current slump?

Let’s go back again to why blockchain is useful.

Blockchain provides complete transparency. Smart contracts provide automated rules for how specific financial instruments and protocols should behave, enforced and governed by code, not relationships.

With blockchain visibility and transparency comes accountability. DeFi apps can’t run away with funds, deploy funds in strategies your retail investors don’t agree with, favor one investor over another, and under-collateralize without others knowing. With blockchain, the whole world can track your movements 24 hours a day and see your every step.

Pantera Capital: Centralized financial institutions are thundering, but DeFi is not dead

A statement from the SEC regarding BlockFi states that BlockFi has misrepresented the level of risk of BIA’s investment opportunities. DeFi lending protocols governed by smart contracts will not allow this to happen because the lending rules are clearly stated in the smart contract.

This transparency does not just refer to a specific DeFi application, but encompasses industry-level transparency of the entire crypto community transacting on the blockchain. Information about the performance of various assets and wallets is fully visible to all. For example, we can use on-chain data to see that wallet addresses that used leverage to buy ETH were under huge liquidation pressure at $600 and $500 ETH. For any participant operating in the market, on-chain market visibility is visible to all, not just those in the know. This increases everyone’s ability to understand what’s going on in the market.

This is in contrast to CeFi’s role of trust, where we rely on market rumors to know which crypto lender is safe to deposit their assets with. We have no way of knowing their balance sheet or what they are doing with your funds because CeFi does not have absolute transparency.

DeFi also uses over-collateralization almost exclusively in lending, providing transparent health risk management. This is similar to how a bank issues a mortgage on a home. The strength of DeFi’s current platforms is over-collateralization, with most DeFi platforms having a minimum collateralization ratio of 110-150%, representing a loan-to-value ratio of 60-90%. In practice, we see strong DeFi protocols (MakerDAO, Compound, Aave) have higher collateralization ratios of 200-300%, representing a loan-to-value ratio of 30-50%. The anonymity of DeFi means that only those with strong risk management practices will survive in the long term, and there is no wiggle room for relationship-based or intuition-based underwritten/undercollateralized loans. CeFi has no such on-chain discipline to make undercollateralized loans to entities they think are good borrowers (and sometimes find out they are not). Conversely, DeFi protocols cannot conduct such behind-the-scenes transactions without the explicit permission of transparent smart contracts.

DeFi participants can also conduct business in the same way before, during, and after a crash without suspending withdrawals or requesting emergency funds. For example, during the LUNA crash, DEXs continued to function normally, while some CEXs were forced to stop withdrawals, which obviously harmed the interests of users, so users suffered losses.

Pantera Capital: Centralized financial institutions are thundering, but DeFi is not dead

We should learn from the 2022 crash. The power of DeFi will be recognized, and we believe that in the next bull market cycle, better tools will emerge for institutions to participate in DeFi, and the strength will continue to grow.

Pantera Capital: Centralized financial institutions are thundering, but DeFi is not dead

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/centralized-financial-institutions-thunder-but-defi-is-not-dead/
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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