As the bears keep growling on the crypto markets, it is increasingly difficult to find a mooning token and that is why TWT has caught the eye lately. The Trust Wallet token has risen by 170% within the past two weeks. Binance, the world’s apex cryptocurrency exchange, recently announced that it had integrated with Trust Wallet, giving users of the platform an easier way to enter into the web3 world with complete custody over their assets. To make this process seamless, it would be eliminating withdrawal fees and the need to scan or input a wallet address from transfers being made from Binance funding wallets to Trust wallets. Then one wonders, why would Binance, a centralized exchange that definitively needs other people’s cryptos, be advocating for and even incentivizing self-custody.
Not Your Keys, Not Your Coins: A Strong Case for DeFi
“Not your keys, not your coins”, this has always been the gospel of the proponents of Decentralized Finance (DeFi). Deeply seated within the ethos of crypto is the idea to be in complete control of both your financial assets and the transactions you make with them — removing the need for a “trusted” financial intermediary. This was the dream of Satoshi, Bitcoin’s creator, and one every spinoff of the orange coin must embody. However, the tech-heavy industry learned that regardless of how disruptive and revolutionary an idea is, people need to be literally carried along to create the network effect necessary for large-scale adoption. At its advent, the switching costs from traditional finance to crypto were high as people found it challenging to prioritize anything else over comfort and simplicity — including privacy and full custody. Hashcash learned this the hard way so Bitcoin was not going to walk this familiar path. This gave rise to the emergence of multipurpose centralized financial (CeFi) businesses. These CeFi businesses supercharged crypto adoption by providing conventional trading platforms, asset wallets, and fiat on-ramp, off-ramp services greatly reducing the barrier to entry for newbies. Now with over 300 million users and accounting for 83.25% of total trading volume, CeFi has grown to not just a mammoth sector within the industry, but the most dominant one by a wide margin.
Therefore, one cannot underestimate how important it is to the success (or failure) of the vision of Satoshi. That is why when 3AC, the “supercycle” hedge fund, Celsius, a crypto lender, and now FTX, the world’s third-largest exchange by volume all misappropriated customer funds and went bankrupt, Satoshi was rocked strongly in his resting yard and the price of “his” coin together with those of the rest of the market nosedived. In the aftermath of FTX’s bankruptcy — the most significant of them all — decentralized finance platforms that have not enjoyed much success as their contemporaries have seized the opportunity to make a case for themselves given the inherent transparent nature of their services. “Not your keys, not your coins,” they say, alluding to the fact that their centralized counterparts usually pool user assets together in concentrated hot wallets which poses the risk of either an internal or external exploit of these assets or both.
Customers actually “lose” custody of their assets when they put them on a centralized platform and can only trust the people who run these platforms. They cannot verify the quality of their assets unless these platforms choose. Bankless, a DeFi podcast community that also runs a decentralized autonomous organization (DAO) recently hosted a Twitter spaces session where it discussed the recurrent failures of CeFi and why the entire crypto industry needs to only trust codes and stop trusting themselves. “Smart contracts are not perfect, DeFi is not perfect (since they are also prone to bug exploits too) but nothing breaks quite like CeFi”, they said. “Don’t trust, always verify”. This then begs the questions. Will a mass migration from CeFi to DeFi be possible? Has the industry truly matured? Can people trust themselves to keep and look after all of their money in their wallets? People can be clumsy, we all know.
The most important challenge DeFi has had so far is the absence of wholesome fiat on-ramp and off-ramp integrations. How do users convert their dollars and euros to ethers and bitcoins and vice versa? Lately, we have seen fiat on-ramp integrations on Metamask, Ethereum’s dominant DeFi wallet, with Transak and MoonPay. MoonPay also partnered with Phantom, a DeFi wallet for the Solana Blockchain. These integrations allow for easy conversion of fiat from credit cards and bank transfers, to assets on the blockchain. However, there has been little to no successful attempt at creating the backward fiat off-ramp integrations. Safe to say that DeFi lets users put in money but not take money out. Something feels like a giant mouse trap here. Therefore, DeFi needs to resolve this to pull users from CeFi to its services.
Also, to an average user, DeFi is difficult to navigate. DeFi wallets are designed to serve as gateways to interact with the world of DeFi. Some of these wallets already have the APIs of popular DeFi platforms integrated within them but most of them still need to. The world of DeFi has mostly been a tapestry of unfamiliar user experiences. Features like swap, liquidity ratio, slippage, and the incompatibility between assets on different blockchains make it a hassle to use these platforms without slight headaches. Liquidity on DeFi is also limited. Since most popular decentralized exchanges use the automated market-making (AMM) model and not the order book model, liquidity is not provided by buyers and sellers but instead by a third party called liquidity providers. The decentralized exchanges have to engineer profitable mechanics for this third group of users which will consequently hurt the value traders receive, relative to centralized exchange options. Asides from this, there are also the risks of impermanent loss on liquidity provision, front-running by malicious players (since pending transactions are visible on the mempools), and prevalent exploitation by phishing protocols.
For it to thrive, decentralized finance will need to offer solutions to these problems which are currently sabotaging the reach of its gospel, then it can look towards winning significant market share from CeFi before hoping to completely dominate the market.
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