The future is decentralized?
If CeFi doesn't work, does DeFi?
It seems clear at our present moment that at least some centralized crypto platforms are not viable. Decentralized finance, aka DeFi, is, we’re told, the solution. No longer will risks be centralized in Sam Bankman-Fried’s empire (or anyone else’s). Decentralization eliminates centralization risk, we are told:
Despite sell-offs, Uniswap, Balancer, Curv, and other decentralized exchanges (DEXs) and decentralized finance platforms have been functioning smoothly, enabling users to exit their crypto positions or, if they prefer, to capitalize on low prices and buy in. Users may have seen their portfolios decrease in dollar value, but they never lost access to their assets. If that isn’t consumer protection, I don’t know what is.
I think it is probably true that decentralized platforms eliminate the risks that centralization bring to the table.
However. FTX, Coinbase, and other centralized services seem to have solved for usability in a way that Curv, etc. have not. Coinbase’s user experience is dead simple, and FTX’s was. Critics of centralized platforms will argue, somewhat reasonably, that ease of use was why so many people were attracted to these platforms. However, DeFi advocates also claim that theirs is the safer model. Well, if theirs is the safer model, then surely you want more people to use the safe platform. But if that platform is too difficult for the average person to use, then what use is it? You can eliminate all the risk of centralization, and if you still have an obscure platform that normal people can’t figure out, you won’t have actually removed centralization from the system.
Here is a long post about usability issues surrounding DeFi. The article lists five main design/usability issues that hold normal people back:
User education
Complex wallet addresses
Clear account recovery process
Too much jargon
Provide users more feedback
These seems like pretty reasonable things to me!
I think part of the problem is that many of the today’s DeFi platforms are designed by twenty-somethings who only interact with their peers. They don’t design for the masses. These would be the same masses that DeFi advocates say ought not use centralized platforms like Coinbase or FTX.
So: if you want widespread adoption of DeFi to happen, you need to figure out a way to design for the average person. That requires that you engage with people who don’t look like you, who are not as technically savvy as you, who are not the same age as you, etc. It’s a hard road to hoe, and Coinbase and others have spent many millions of dollars abstracting away technological complexity.
There are other issues, as well, which bear consideration. One is the sheer complexity of some of the concepts. Balaji Srinivasan correctly notes that decentralized exchanges ought to have cryptographically signed proof-of-reserves.
He links to Nic Carter’s page about proof of reserves. I don’t want to pick on either Balaji or Nic here—they provide a valuable service, and their point about proof of reserves verification is important. However—and this is the sticking point—this is a complicated endeavor, and as with usability, above, I have my doubts that average, normal users are going to be able to do much with this information. Consider what Nic writes:
The idea is to prove to the general public, and in particular your depositors, that your cryptocurrency held on deposit matches up with user balances. Of course, in practice, this isn’t quite so simple. Proving that you control some funds on chain is trivial, but you could always borrow those funds on a short term basis. This is why point-in-time attestations mean relatively little. And additionally, exchanges can have hidden liabilities or have creditors claim seniority to depositors, especially if they don’t legally separate client assets on the platform. This is why policy like Wyoming’s SPDI law clarifying the legal status of depositors relative to custodial institutions is so important.
Again—this all makes sense. But the average person out there isn’t going to have the first clue about any of this. Traditional finance has built up a regulatory and administrative function over centuries—yes, centuries—which generally and broadly protects average customers’ rights and interests. Yes, sometimes, as during the Global Financial Crisis, parts of this system fail, and, yes, some retail customers get screwed. But virtually none of our consumer financial system requires a customer to be an expert in, for example, bank accounting.
The average person simply doesn’t have the time or inclination to engage with all of this complexity. If decentralized finance is the future, its builders need to find a way to reliably and consistently abstract away all of the complexity inherent to it, in order that average users can use these services. If decentralized finance builders can’t figure that out, then the future is not going to be a decentralized one.