Is DeFi Going Up In Smoke?
Decentralized Finance (DeFi) has been widely considered one of the best applications for cryptocurrencies. The ability to access financial services without the burden of meeting specific banking requirements has led to increased financial security for many around the world.
However, there has been a variety of issues plaguing DeFi protocols around the internet lately, causing many to question how reliable DeFi can be. Coupled with the instability of certain coins pegged to the US Dollar such as TerraUSD, the criticism is not to be taken lightly.
Celsius freezes its funds
Celsius has been under fire lately for freezing all of the accounts on their protocol as the price of bitcoin fell.
This action comes in sharp contrast to the opinions that Celsius CEO Alex Machinsky has made about banking and centralized financial institutions.
While Machinsky claims that centralized banks are bad for people, the similarities between his own DeFi protocol and banks are strikingly close. The ability to lend and deposit funds is the essence of a bank and they are the same services provided by the Celsius protocol.
The network has also not been proven to be very secure either. In June 2021, the company was reported to have lost upwards of 35,000 Eth after the keys to their Ether holdings on Stakehound were lost.
The company also reportedly lost about $22 million in bitcoin at the end of 2021 when Badger DAO was hacked.
Because of these failings, and the current crypto market situation, trust in the leadership at Celsius has reached a low point with many questioning Machinsky’s abilities to lead the protocol back to success with a chapter 11 filing looming in the distance.
Solend risk centralization
Solend, the primary DeFi protocol on the Solana network, has been in hot water lately after a whale was spotted depositing a massive amount of liquidity into their protocol.
Normally, this would be seen as a good thing, but because the whale had deposited such a massive amount at a time when the price of Solana was steadily dropping, the chance of the entire deposit being liquidated was extremely high.
The potential liquidation was so intense that it would have impacted the entire Solana network and created major congestion on a network which has already been forced to shut down multiple times this year.
The DeFi protocol promptly created a DAO to hold a vote to determine if they would intervene and assume control of the whale’s liquidity which sparked outrage among crypto communities claiming that they were voting to break decentralization.
Fortunately, when the vote passed to confirm the protocol’s ability to assume control, Binance revoked the defi’s ability to control the whale’s funds. Instead, Solend reached out to the whale to work together to address the situation.
While the whale never lost control of their funds, it’s important to note that Solend was willing to break a core component of blockchain technology by acting as a third party and taking control of another person’s wallet.
Solana has already faced criticism for being a centralized network with the majority of its liquidity being owned by the Solana team and Venture Capitalists.
Harmony One is the victim of another DeFi hack
Harmony One has become the most recent target of a DeFi hack which saw over 85,000 Eth being stolen from the protocol.
While the team at Harmony has been in close contact with Blockchain forensic teams and the FBI, the attack still shows that decentralized finance is still difficult to trust.
As good as a team might be, there is still the very real chance of someone coming in and stealing as much profit as they can.
To add to the problem, the wallet that was connected to the stolen funds has begun sending batches of Eth into Tornado Cash where the Ether can be mixed with other Ether deposits to hide any trace of where the stolen money came from.
While many protocols ban the acceptance of these mixed batches of Ether, it is still valuable among select circles running these types of scams.
What Does DeFi need to become more secure?
The current situation surrounding DeFi is one that can’t be overlooked. The DeFi protocol has been largely regarded as one of the best applications for cryptocurrencies and their power to bring financial stability to those in need (especially in countries where access to banks is limited).
However, with so many issues plaguing a variety of different protocols, it’s becoming more difficult to trust them.
By taking a closer look at what is harming DeFi services, we can pinpoint three main things that need to be identified when choosing to deposit liquidity into a DeFi protocol:
Strong leadership and team
Commitment to decentralization
Top-tier security
Is DeFi finished?
Cryptocurrency, by design, is meant to be uninsured due to its decentralization. While this has many benefits, there are also many risks that come with it.
Not all DeFi protocols run the same way and trusting the wrong people with your liquidity can lead to serious situations. Always be aware of who is running these services and if they’re playing any tricks to use your money as their profits.
There are still many reputable DeFi protocols that exist such as Compound, AAVE, Yearn, and many others. DeFi isn’t dying, we’re only seeing this current market dip weed out the protocols which weren’t going to last.
