Last month, one of the largest centralized crypto lenders in the world told its users that it was freezing their accounts. Celsius Network was responding to the plunging prices of Bitcoin, Ethereum and other cryptocurrencies, which were undermining the organization’s liquidity.
The Celsius crisis came hot on the heels of the dramatic collapse of the Luna coin, which went from US$86 to essentially worthless in the space of a week. This had a big impact on another centralized crypto exchange, Binance, whose 2018 investment of US $3,000,000 into Luna is now valued at just over US $2,000.
As someone who has been involved in the crypto industry for a long time, witnessing such catastrophic failures is nothing new. But that doesn’t mean I stop being outraged by them. It’s always tragic when ordinary people lose their savings because a lack of control and transparency has subverted a space that is supposed to be about the opposite.
This is why I believe that the major outcome of the Celsius crash should be a recommitment by the crypto industry to the principle of public blockchains and decentralized finance, also known as DeFi. But first, let’s dig deeper into what caused Celsius to overheat.
Who Controls your Custodial Wallet?
Celsius is a centralized crypto lender, which means that all transactions occur on a closed system rather than an open source, decentralized blockchain. Users of Celsius and other centralized exchanges (CEXs) like Binance and Coinbase do not have control of their own funds. Instead, the exchanges are custodial wallets that control a user’s private keys.
While this typically allows for a simpler user experience, it also means the platform can freeze access whenever it wants, cutting off users from transacting as they wish. It also makes high risk activities like leverage and margin trading easier, which puts customers in a position of potentially losing more than they can afford, especially in the case of a sudden market collapse like the one we’ve just experienced. And, in the Case of Celcius, it also puts the company in a position to lose more than it can afford – then hand the bill to it’s customers.
Finally, unlike an open source blockchain, CEXs are closed systems that are not answerable to customers. Much like the complex and often covert subprime packages that caused the 2009 financial crisis, centralized crypto exchanges can chase quick profits with high risk off-chain bets without customers ever knowing that their assets could be exposed in the event of a downturn.
Defining DeFi
To appreciate how decentralized financial (DeFi) systems are essential to rebuilding trust in customers, here’s what I believe defines a decentralized exchange.
1) All asset transactions happen on-chain
A truly decentralized exchange (DEX) is completely transparent. Anyone can access and verify every asset transaction that happens on the chain. Unlike a CEX, which can do whatever it wants with assets under its control, nothing can be done with DeFi assets without customers knowing.
With full transparency, everyone is a potential whistleblower. This prevents DeFis from moving dark pools of funds to trade off-chain or putting the entire system at risk by over-leveraging assets in pursuit of quick profits.
2) Customers control their own assets
As each customer on a DEX holds the private keys to their own wallets, they always remain in control of their assets. While a CEX can try to protect a failing system by putting a block on all transactions, a true DeFi platforms can never stop customers from making withdrawals.
Just as exchange failures and hacks of the past drove the first wave of DEX adoption, so the recent failures of major centralized players like Celsius demonstrate why the crypto industry must recommit to a non-custodial approach.
3) Every coin is accounted for
You can’t play with assets that don’t exist on a decentralized system. Unlike on a CEX, leveraged trading or margin call bets simply aren’t possible on-chain because every Bitcoin, Ether or whatever token the exchange uses must be accounted for.
While individual customers could access credit sources on-chain, those assets are still derived from the total accounted-for coins. Even when faced with high withdrawal volumes, the system won’t collapse because the liquidity is always there.
Making DeFi More Accessible
While I believe that DEXs should be the future direction of the crypto industry, I also understand that in their current form most aren’t accessible to normal people.
DEXs are usually not very user-friendly. And that’s often an understatement. Not only would people like my parents find the typical DeFi interface completely unfathomable, so would anyone who hasn’t spent the better part of a decade completely engrossed in the crypto world.
But this isn’t a difficult problem to solve. AIKON’s ORE ID makes having multiple blockchain accounts as simple as logging into Google, while ORE Vault allows teams and businesses to manage shared crypto wallets securely.
We need more fresh ideas and new thinking around the DeFi user experience. Creating DEXs that give customers total transparency, control and security, but are as easy-to-use as the popular centralized systems, will enable DeFi to become the trusted and sustainable crypto experience for everyone.
About AIKON
Blockchain and crypto are technologically complex. AIKON makes it simple. We’ve built a suite of intuitive products built on the ORE Network ($ORE) for enterprise companies looking to provide a seamless user experience that works cross-chain with Algorand, Ethereum, EOS and more.