DeFi systems will handle shocks in the financial landscape much better than CeFi, says Waves founder Sasha Ivanov.
The world of decentralized finance (DeFi) exists in response to the limitations associated with centralized finance. It’s gatekeepers, high service fees, and the need to trust costly intermediaries every step of the way. Unfortunately, the existence of decentralized resources hasn’t stopped the proliferation of centralized services that offer them.
These platforms might be more accessible for some users, but they still suffer from the same problems as their older counterparts, if not worse. Not only do they carry the same risk as their decentralized counterparts, but they also cannot offer the same mitigations that are facilitated by decentralized governance.
This has been illustrated by the crisis reactions of various DeFi and CeFi protocols lately amid the bear market and subsequent liquidity crisis.
DeFi vs. CeFi: A Tale of Two Protocols
For our purposes, we will compare how the recent market downturn has affected both the centralized Celsius Network and the decentralized Vires Finance. But first, let’s discuss how each of these services works.
At Celsius, clients invest their wealth in a proprietary account, which is then loaned to select investors or invested in high-yield protocols. This is how customers passively earn weekly bonuses that generally have rates much higher than anything from the traditional banking world. Celsius upgrades and developments are ultimately determined by the core team.
Vires, on the other hand – a non-custodial liquidity protocol based on Waves Blockchain – offers a variety of decentralized markets for assets such as WAVES, USDN, USDT, USDC, as well as Bitcoin lending and borrowing. The platform encourages user participation through decentralized governance. Any user can start earning by locking their wealth into liquidity pools, which also gives them the right to vote on future network developments.
Therefore, we have two different passive earning protocols, with the main difference being the centralized control. But how did both fare when the liquidity crisis hit?
Transparency is very important
First of all Celsius. As a centralized company, Celsius has been very opaque about managing funds and risk. Customers were left in the dark about how their funds were being used and even how the business was being run. When the crisis hit, customers didn’t see it coming and had no choice but to trust Celsius. They were simply informed via email that their accounts had been suspended indefinitely.
Two months later, Celsius announced it would file for Chapter 11 bankruptcy — indicating years of litigation for the company and its users. Users just have to wait and see if and when they will get their money back.
In contrast, since it is a decentralized and community-managed protocol, Vires users can see everything that is going on. Every transaction is recorded in a public ledger and this information is readily available. Which pools are supported, what risk and reward levels are acceptable, when positions should be liquidated and much more is discussed and voted on by the community itself. The team behind Vires can make new suggestions, but they will only be implemented by majority consensus.
DeFi vs Cefi: Crisis
When the same crisis led to the de-pegging of the stablecoin Neutrino (USDN) and a subsequent liquidity crisis at Vires, the team behind it quickly outlined a proposed solution for the community. Most users didn’t subscribe to the initial suggestion, but subsequent community discussions and feedback eventually yielded a plan that satisfied 75% of voters.
This plan gave users two ways to recover funds, both of which result in the platform paying back all within a year and with a 5% bonus. The point is that DeFi protocols that practice decentralized governance give real power to users and, if properly governed, can mitigate and resolve any crisis in a way that protects the interests of the community, not the company.
These are just two examples, but they highlight the key differences between centralized services run by closed organizations and community-owned DeFi platforms. It’s perhaps important to point out that not all centralized systems encounter these problems, and not all decentralized systems are bug-free, but the divergence between the two is clear.
About the author
Sasha Ivanov is a technology entrepreneur, scientist, all-round blockchain visionary and founder of Waves, a multipurpose blockchain platform that supports various use cases including decentralized applications and smart contracts.
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