Jun 17, 2022 - Economy

Crypto finance isn't always "DeFi"

Illustration of a collage of circles made of money forming a decentralized web.

Illustration: Shoshana Gordon/Axios

If something is financial and in crypto, does that mean it counts as "decentralized finance," or "DeFi"? Short answer: No.

Why it matters: The question is more salient right now, with crypto lender Celsius Network locking up users' deposits as questions swirl about its solvency, drawing interest from several state regulators.

  • Celsius is a crypto company funded with an initial coin offering. It gives people interest on deposits in bitcoin and ether. So does that make it DeFi? Also: No.

Reality check: DeFi founders propose a different model for financial operations, one where everyone always operates by the exact same rules as everyone else, risk is always completely clear and no one gets a special deal.

What is DeFi? All the financial operations occur autonomously, on a blockchain, using a kind of computer program that blockchain types refer to as a "smart contract" (but I like to call a "robot on the internet").

  • Take a DeFi lender: Every single interest-earning deposit and every single loan that's accruing interest can be seen on the blockchain. Similarly, every liquidity provider on an automated market maker can also be viewed, along with every trade it makes in each block.
  • Compound Finance, one of the earliest DeFi money markets, shows daily updates for the total deposited and the total borrowed in each asset it supports right on its website. Here's where you can find the stats for ether. It currently has $717 million in ETH deposits and $13.7 million lent out.
  • If you have the skills, you could make your own portal that gave you updates every minute.

The problem isn't access to the information. The problem is making sense of it because so much is available.

On the other hand: Celsius doesn't work anything like this. Going all the way back to 2019, onlookers raised concerns about the transparency of its operation.

  • At its core, Celsius has always promised to return much more of the income it makes from loans to its users than traditional banks do.
  • What it didn't promise, however, was to make it clear how it earned those returns on a day-to-day basis.

Threat level: A DeFi platform couldn't suddenly lock out users' deposits, as Celsius did this week. If it were even possible, they would have to post a proposal for a public vote and discussion first (giving everyone more than enough time to go into a bank run).

How decentralized, though? A project is considered decentralized when it's controlled by lots and lots of people. For example, a project with 1,000 people with a vote over its future would be less decentralized than one with 10,000 people with say.

  • That said, many DeFi projects are, in practical terms, controlled by a few people with most of the tokens.

Our thought bubble: Decentralization might have been the wrong place to put emphasis, though "DeFi" sounds like "defy" — which is fun. Maybe SeeFi could have been better? As in, users can "see" what's going on.

Go deeper