When high-profile crypto lending platforms Celsius and Voyager failed recently, declaring bankruptcy, many mainstream commentators interpreted it as another ‘death blow’ to cryptocurrency. But, in reality, their collapses were probably a necessary, if painful, step in the life of crypto, and will likely result in a much safer sector.
The truth is that platforms like Celsius, Voyager, BlockFi, and Nexo, are categorically not DeFi (decentralised finance) platforms. They are in fact completely centralised, custodial platforms – i.e., if you deposit your crypto with them, they control the keys.
Unfortunately, because these platforms used cryptocurrency, and because most commentators simply don’t understand the crypto and blockchain space properly, a large number of users assumed they were decentralised. That was a costly mistake.
Now, there is nothing wrong with centralised platorms per se – they are convenient, allowing users to easily sign up and get started quickly. But, and it’s a big ‘but’, centralised platforms are vulnerable to the same issues that have long plagued the traditional financial system.
You see, because centralised financial service platforms give single actors a huge amount of power and responsibility, if those actors don’t behave responsibly, things can go very wrong, very quickly. This is why the traditional financial industry, like banks and mortgage lenders, are so heavily regulated and subject to intense oversight.
In the case of Celsius and Voyager, the risky moves they were making, with users’ crypto deposits, in order to generate enough yield to pay the promised returns, led to a death spiral when TerraUSD (UST) became unpegged from the US dollar.
Real DeFi Platforms
But, on the other hand, platforms like Aave, Curve, Compound, Maker, and Uniswap, are decentralised, non-custodial platforms. When you connect to them, you connect your own wallet, and you retain control over your crypto keys.
These platforms also have a much simpler business model – essentially providing a platform enabling a simple lender/borrower relationship. And, instead of promising unsustainably high interest rates for lenders, DeFi platforms use their own native tokens to bump up rewards – which, although not as tempting to many people, is obviously more realistic and less prone to systematic contagion. Needless to say, DeFi platforms, that aren’t engaging in risky leveraging practices, are also much better collatorised – providing further security to users.
So, despite the drama of the last few months, which has seen cryptos lose considerable value across the board, and scared away a lot of participants. The truth may well be that the centralised crypto financial services sector needed to be tested to weed out the reckless actors.
Now, as we go forward and the crypto winter thaws, the well-run centralised platforms and true decentralised platforms will be able to lead the way to a brighter future.