The world of decentralized finance (DeFi) exists as an answer to the limitations surrounding Centralized Finance. That is gatekeepers, high service fees, and having to trust costly intermediaries every step of the way. Unfortunately, the existence of decentralized assets hasn’t stopped the proliferation of centralized services that offer them.
These platforms may be more accessible to some users but still suffer from the same issues as their legacy counterparts, if not worse. Not only do they carry much the same risk as their decentralized counterparts, but they can’t offer the same mitigations facilitated through decentralized governance.
This has been exemplified through the crisis responses from various DeFi and CeFi protocols of late amid the bear market and subsequent liquidity crunch.
DeFi vs CeFi: A Tale of Two Protocols
For our purposes, we’ll be comparing how the recent market downturn affected both the centralized Celsius Network and the decentralized Vires Finance. First, though, let’s discuss how each of these services works.
With Celsius, clients deposit their assets into a company-run account, which are then loaned out to selected investors or placed into high-yield protocols. In doing so, clients passively earn weekly rewards, which generally have much higher rates than anything from the traditional banking world. Celsius upgrades and developments are ultimately determined by the core team.
Vires, meanwhile – a non-custodial liquidity protocol based on Waves Blockchain – offers a variety of decentralized markets for assets like WAVES, USDN, USDT, USDC, as well as Bitcoin lending and borrowing. The platform encourages user participation via decentralized governance. Any user can begin earning by locking their assets into liquidity pools, which also gives them the right to vote on prospective network developments.
Hence, we have two different protocols for passive earning, with the main difference being centralized control. But how did each fare when the liquidity crisis struck?
Transparency Is Deeply Important
First up, Celsius. Celsius, being a centralized company, was very opaque about how funds and risks were managed. Customers were in the dark about how their funds were utilized and even how the business was run. When the crisis struck, customers didn’t see it coming and had little recourse but to trust Celsius. They were simply informed via email that their accounts had been frozen indefinitely.
Two months later, Celsius announced that they would file for Chapter 11 bankruptcy – indicating years of litigation for the company and its users. Users simply have to wait to find out if and when they may get their money back.
By contrast, being a decentralized and community-governed protocol, Vires users can see everything going on. Every transaction is recorded on a public ledger, and this information is available at all times. Which pools are supported, what levels of risk and reward are acceptable, when positions should be liquidated, and much more are debated and voted on by the community itself. The team behind Vires can make new proposals, but they only become enacted through majority consensus.
DeFi Vs Cefi: Crisis
When this same crisis led to the de-pegging of the Neutrino (USDN) stablecoin and subsequent liquidity crunch on Vires, the team behind it quickly outlined a proposed solution to the community. Most users weren’t onboard with the first proposal, but subsequent community discussions and feedback ultimately birthed a plan that satisfied 75% of voters.
This plan gave users two options to restore funds, both of which will lead to the platform repaying everyone within a year and with a 5% bonus. The point is that DeFi protocols practicing decentralized governance give users genuine power and, if appropriately governed, can mitigate and resolve any crisis in a way that looks after the community’s interests, not the company’s.
These are just two examples, but they highlight the essential differences between centralized services run by closed organizations and DeFi platforms owned by the community. It’s perhaps important to caveat that not all centralized systems run into these issues, and not all decentralized ones are without fault, but the divergence between the two is clear.
About the Author
Sasha Ivanov is a technology entrepreneur, scientist, all-around blockchain visionary, and the founder of Waves, a multi-purpose blockchain platform that supports various use cases including decentralized applications and smart contracts.