Cryptographic networks that pledged to control users have come to the forefront as they try to survive the deepening crisis in the digital asset market.
Last week, three decentralized financial groups intervened with contingency plans to protect their projects and users from the economic pain of falling cryptocurrency prices.
The three platforms — Maker DAO, Bancor, and Solend — are not familiar names. But they are prominent in the world of decentralized finance, a corner of the crypto world that aims to build an alternative financial system without a central decision-making authority.
But the sharp falls in recent months have wiped out $ 2 billion, or more than 70 percent, of the total market value of cryptography since November, giving a strong impetus to those dreams of decentralization.
“I don’t think many of these entrepreneurs have anticipated this in their scenario analysis,” said Stephen Diehl, a software engineer who has become one of the leading skeptics in cryptography. “It really speaks to a deeper truth that most of the rhetoric of decentralizing cryptography is, at best, aspirational and, at worst, just empty marketing.”
Proponents of decentralized finance, or DeFi, have been influenced by the promise of a utopian financial future without a centralized intermediary such as a bank or stock exchange. These layers only add costs and make the financial system more inefficient, they say.
Instead, users can exchange, lend, and borrow assets through contracts that are defined in computer code. Decisions about the future direction of these platforms are often determined by the issuance of votes by people with special government records. They are often issued to developer teams and early investors.
But DeFi has also earned a reputation for being the wildest of the “wild west” in the largely unregulated cryptographic world, with regular thefts of tokens worth hundreds of millions of dollars as hackers exploited systems badly. designed.
Last weekend, users of Solend, a loan platform built on the Solana blockchain, proposed taking control of its largest user’s portfolio. Traders feared the repercussions if the Solana currency, which fell below $ 27, fell to $ 22.30, a price that threatened the platform’s economy.
“[The wallet] it has an extremely large margin position that is putting the Solana protocol and its users at risk, ”he warned. If Solana fell below $ 22.30, market ripples meant “Solend could end up with bad debts,” he warned.
Solend withdrew the emergency powers plan following criticism from users, but said he was “committed to protecting users’ funds, transparency and doing the right thing.”
Bancor, meanwhile, cited “hostile market conditions” as a justification for temporarily stopping a service which meant users were no longer protected if their deposited deposits were subject to large market fluctuations. Bancor’s team said it would ask those with voting power to ratify the temporary pause.
And Maker DAO, a collective that manages the stable currency Dai, a cryptocurrency designed to be linked to the dollar, voted to freeze a link to the AAVE loan platform, due to the latter’s exposure to a another troubled lending platform, Celsius.
Leading a commercial network through a consensus vote in theory means that users have more voice in the future of the project, according to Ingo Fiedler, co-founder of the Blockchain Research Lab and a professor at Concordia University in Montreal, Canada. But this is not always the case, he said.
“Governance is very focused on a few players who can coordinate to change the rules for their own benefit and at the expense of other users,” Fiedler said.
Emergency plans were a demand for global regulators, who have warned that some DeFi projects were more centralized than indicated by their marketing.
A report from the Bank for International Settlements this week questioned whether DeFi projects could ever expand into a proper monetary system because developers could not predict all market movements.
“The impossibility of drafting contracts to specify what actions should be taken in all contingencies, requires some central entities to resolve disputes,” he said. More efficient methods of accelerating and managing higher payment volumes also tend to lead to a higher concentration of computing power, he added.
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While regulators warn of the shortcomings of DeFi, the market is making its own judgments. For some DeFi enthusiasts, the unplanned moves of Maker DAO, Bancor and Solend only make those who have never committed to the DeFi ethos.
“This is very beneficial for truly decentralized applications,” said Charles Story, head of growth for Phuture DAO, a DeFi project. “Users of real DeFi applications have no problem because there is transparency,” he added.
But for others, it is little more than the reality that is reaffirmed in the financial markets.
“Politicians are right, decentralization is nothing new. There are new ways to make value transactions, but the concept of a new entity that has no real centralization is not true, “said Ian Taylor, head of crypto and digital assets at KPMG.
“What we’re going to see is a shake-up of suitors, because they have poor risk processes,” Taylor said. “We’ve seen it over and over again,” he added.
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