Market Overview

There are approximately $40 billion worth of Total Value Locked (TVL) assets on smart contracts in the DeFi space as of Q2 2022. The dynamics are negative in light of a general market downturn, but DeFi remains a powerful force that offers a slew of solutions for passive income generation.

Staking, lending, liquidity pools, Play-to-Earn, GameFi, Move-to-Earn, and the many other variations of earning instruments are all part of DeFi. The combined liquidity pooled into these and many other instruments constitutes the value locked on smart contracts. However, virtually all of the platforms holding TVL are actually quite centralized.

In stark contrast to the virtues of decentralization, DeFi protocols have a centralized authority that applies a custodial model of user private key management, maintains its own wallets at times, and has almost complete control of the assets it has surrendered under management. Let us face the fact that most DeFi platforms are inspired by traditional banking institutions. And as digital parallels to banks, such platforms often use the assets they are entrusted by users to make investments of their own. After all, banks do the same; otherwise, how would they be able to pay the interest promised for savings accounts?

The example of the collapse of the Celsius protocol in June of 2022 is a wonderful illustration of how DeFi protocols fail just like banks that make unsound investment decisions—and users end up paying the price.

Such waning trust towards the “decentralization” of Defi, or rather its actual centralization, is giving rise to a new trend. Many protocols and users alike are making the move from centralized platforms and exchanges to decentralized ones, embracing their virtues and benefits in spite of the disadvantage such insufficiently tested solutions bear. It’s better to ensure some inconvenience with incomplete interfaces of decentralized platforms than to risk losing all the funds in an account to a hack or security breach.