We're told DeFi is the Wild West. Untamed. Risky. What if the greater risk isn’t in the decentralized wild west, but rather the concentrated hand of CeFi? What if, in our zeal to regulate DeFi out of existence, we lose sight of the ticking time bomb that is centralized crypto lending. As someone based in Singapore, observing the Asian crypto landscape, the question isn't if centralization is a risk, but how big?
CeFi's Grip A Fragile Foundation?
Let's look at the numbers. They tell a story many are ignoring. As the crypto lending markets are quickly recovering, CeFi continues to languish. The FTX collapse still looms large, as it should. Who controls the CeFi lending market? A startling 89% is held by just three platforms: Tether, Galaxy, and Ledn. Tether alone accounts for nearly three-quarters. That’s not stability; that’s a recipe for a single point of failure.
Think of it like this: You have a skyscraper built on three pillars. Okay, great, it’s flashy and beautiful—but what if one of your pillars collapses? FTX showed us exactly what happens. Now picture a major American city constructed based on the thousands of individual footings. That's DeFi. Imperfect, yes, but fundamentally more resilient.
What we’re observing is that traditional financial institutions are starting to dip their toes into borrowing/lending against their crypto. That's good, right? More liquidity, more stability! Maybe. But what if, instead, they simply reproduce the concentrated power structures of traditional finance inside the crypto world? Are we simply bringing into our new communities the very issues we were seeking to flee from ourselves?
Asian Perspective Regulation's Double-Edged Sword
Environment here in Singapore, and really all of Asia, regulators are still sort of wrestling with crypto. The regulatory knee-jerk reaction is to lurch toward banning, or in some way restricting, whatever seems dangerous—which too often includes DeFi. Is that the right approach? Imposing burdensome regulations on DeFi would hinder innovation, drive activity underground, and make the entire market less safe.
Imagine the folly of trying to control a river through damming it. The water could remain trapped indefinitely, but at some point, pressure will build up. When that occurs, the dam ultimately crumbles, or the water will find a different path—one that causes exponentially more destruction.
In the meantime, the concentrated power of this example of CeFi is left to police itself. This is exactly where the real systemic risk comes in. We need to ask ourselves: are we so focused on regulating the perceived dangers of DeFi that we're ignoring the actual dangers of CeFi's centralization?
DeFi's Resilience CeFi's Centralized Failure
The numbers speak for themselves. According to the report, DeFi lending applications led the charge with an incredible 959% increase from Q4 2022. That's not a fluke. Admittedly, that’s largely because of the decentralized, algorithmic magic of lending self-service. Decentralized finance thrived during the bear market as CeFi platforms such as FTX, Celsius, Voyager, and many others declared bankruptcy. Why? Due to the transparent and auditable nature of DeFi, as well as its dependence on smart contracts. There's no single point of failure. No CEO to embezzle funds. No backroom deals.
This isn't to say DeFi is perfect. Rug pulls happen. Smart contract vulnerabilities exist. Yet these are challenges that can be and should be overcome with stronger auditing, enhanced security measures, and local democratic control. The most important aspect of these risks is that they are collective, and not concentrated in the hands of a few powerful players.
Compare this to CeFi, where opacity is the name of the game. Data is few and far between, reporting is haphazard, and it’s hard to know what’s truly happening behind closed doors. Without transparency and the public accountability it brings, this poses a ripe opportunity for mismanagement, fraud, and regulatory capture.
The myth that centralization equates to safety is exactly that: a myth. The FTX collapse proved it. As we’ve seen with the FTX debacle, centralized entities are always susceptible to human error, greed, and corruption. DeFi, in its transparency and auditability, provides a much stronger and resilient option. At NPR, it’s time to stop being scared of decentralization. Instead, let’s get real on its promise to create an equitable, more stable, and accountable financial system. Isn’t this terribly ironic? Ironically, the very thing we fear most—decentralization—might be our financial salvation! We cannot allow fear to cloud our judgment and cause us to miss opportunity. Let's regulate responsibly, not reactively, and focus on the real risks facing the crypto market: the dangers of unchecked centralization.
