How decentralized is DeFi, really?

How decentralized is DeFi, really?

DeFi has had a tough two years. During the halcyon days of DeFi’s summer of 2020, he promised to create an alternative to banks and the traditional financial system. Two years later, the evil actors stole billions of dollars through hacks. There are scams and Ponzi schemes, with many wondering just how decentralized DeFi is or ever was. Coming back to the word “decentralized,” many critics now see the term as misleading. Is a DeFi protocol decentralized if you have, say 

What if you have fewer than 50 GitHub commits or fewer than 50 admins picking governance issues and tabulating Snapshot.org votes? Only a small handful of DeFi protocols would qualify under each of these standards.

The Maker’s leadership team makes important decisions

Most DeFi protocols don’t meet the definition of their main descriptor: decentralized. Core development teams still manage most DeFi protocols. For example, $7.8 billion is locked into Maker’s “decentralized” autonomous organization (DAO) ecosystem. Maker supports one of the world’s most popular stablecoins, DAI, which has a market cap of more than $5 billion.

Instead of holding the liquidity-supporting DAI on public blockchains, MakerDAO pays centralized asset managers who are signatories for investments off the blockchain. This includes a broad portfolio of bonds, real estate, and commercial contracts. As signatories to these assets and advocates for other investments, Maker leadership makes important investment decisions on behalf of the treasury. About half of Maker’s collateral consists of USDC, a licensed stablecoin redeemable with a single issuer, Circle, which has unilaterally censored certain USDC tokens.USDC and its variants, such as PSM-USDC-A, make about a third of you out of warranty.

Maker’s collateral table breaks things down by assets, maximum debt limits, and stability fees. There are “ETH-A,” “ETH-B,” and “ETH-C” categories that use ETH but have different stability fees and maximum debt limits.

Fax fails an audit and appears barely decentralized

Another purportedly decentralized stablecoin, the multi-billion dollar FRAX, also has a large USDC pool. Currently, USDC contains 93% of the assets locked in liquidity protocols and smart contracts for Frax. Worse, a September audit revealed major trust issues with Frax leadership, including administrators with little-known special powers. Its elite privileges include the capacity to create an infinite supply of fresh, modify the protocol status of a freethinker, and withdraw money from frxETHminter. (fixed by Frax is a proprietary variant of Ethereum that supports FRAX pegging in terms of liquidity and pegging.

Administrators can also set any address as a validator, including their own. They also pointed out potential security vulnerabilities that could trick a malicious validator into launching a frontal attack. All these insights underscore centralized decision-making and the need for trust. For a supposedly decentralized stablecoin to maintain its peg. Auditors rated Frax Finance administration rights as “medium risk.

DeFi darling Aave doesn’t look any better

Some DeFi applications like Aave can circumvent the risk of a single fraudulent administrator by requiring multiple parties with access to a multi-signature wallet to agree to changes. The multi-signature wallet for Aave has nine owners as of right now. Only three can agree to change. Also, multi-signature wallets are not foolproof, especially when some owners conspire to change without others’ permission. 

Uniswap pretends to be community-governed

Numerous voters receive governance tokens that are used in many DeFi protocols. However, DeFi applications like UniSwap use a voting model that gives more power to companies that hold more tokens (or at least can convince token holders to delegate their tokens to vote). Control group). This asset-based voting model allows companies that can afford to buy more tokens to control the protocol. Additionally, administrators have the power to decide without consulting voters. For instance, without obtaining a public vote, UniSwap removed 100 tokens from its website.

He insisted that tokens were only removed from his site’s UI and not from the log, but almost all UniSwap users interact with the site’s log.

How much is decentralized in DeFi?

DeFi uses the token to distract retail investors and promises decentralized governance that rarely exists. Typically, a small group owns multi-signature wallets, controls administrative functions, leads code development, and chooses topics to vote on. The ICO craze may have died out years ago, but governance token issuance is remarkably similar. DeFi advocates still lure private investment by promising high returns or presenting visions of a brighter future with bankless decentralized finance.

Most of these protocols, however, are probably going to be partially decentralized. Developers will likely still control them or cede most of the power to large investors. Auditors might even find bugs in the code that could give administrators control over the contracts. Devi’s many flaws make the promise of decentralization a false branding exercise.

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