Over the past few months, Digital Assets and Decentralized Finance (DeFi) have received negative press from traditional media following the events that lead to the liquidation of Terra/Luna, Celsius and Three Arrow Capital, et al.
“Cryptocurrencies keep nosediving . . . The chaos has spread to DeFi: Celsius, a crypto lender with assets of around $20 billion, was recently forced to freeze deposit withdrawals. Last week, crypto exchange FTX said it was bailing out one of Celsius’ troubled rivals, BlockFi, with a $250 million loan, not long after rescuing crypto broker Voyager Digital.”
— Jon Sindreu, Wall Street Journal, June 30, 2022
The whole article is a screed gleefully ruing the alleged failure of DeFi.
There’s a huge misconception that DeFi – Decentralized Finance – failed. It didn’t – it worked great!
DeFi showed a flawless performance over the past months. During the months of May and June 2022, DeFi institutions liquidated loan positions worth hundreds of billions of USD in value, without skipping a single bit. Codes were executed automatically by computers, every position that triggered liquidation was unwound instantaneously. Without any need for government intervention or bailout.
We, at Algo Capital, experienced first-hand what happened during 2007-8 within the traditional financial system: Bearn Stern, Merryl Lynch and finally Lehman Brothers all were forced to liquidate or salvaged by a bigger institution. It took years and hundreds of billions of government funds to safeguard and eventually unwind the open financial positions. DeFi achieved the same (or more) in 2 months, automatically, without any government or administration intervention.
This time, it was Centralized Finance (CeFi) that failed. All five of the companies that failed during May and June 2022 were just old-fashioned venture-backed start-up companies. They were not DeFi or on the blockchain at all. Just some start-up banking entities that got overleveraged. Very old school failure actually. Nothing new or novel about it.
DeFi protocols – like Aave, Compound, Uniswap, MakerDAO – all functioned flawlessly 24x7. This crisis proves the opposite of the common narrative. It proves DeFi works great. Way better than centralized finance firms like Celsius, BlockFi, Lehman Brothers, et al.
DeFi, rock solid and totally transparent, removes human subjectivity in financing decisions process. Parties agreeing to conduct transactions openly and transparently on the blockchain, as opposed to backroom deals by opaque, human, potentially-conflicted financial actors, is the vision we should be striving for, rather than clinging on to inefficient centralized financial systems.
The Centralized Finance companies were forced by smart contracts to pay back the DeFi protocols in full, without the need for the intervention of liquidators, because forced by DeFi smart contracts.
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