DeFi or decentralized finance is one of the hottest buzzwords in crypto. The term refers to platforms that can automate traditional financial services such as borrowing and lending, margin trading and insurance. DeFi relies on smart contracts run by decentralized networks to remove middlemen in the process, offering more favorable terms and interest rates to attract consumers.
While DeFi sounds promising, Litecoin founder Charlie Lee is not a fan. On Sunday, the former Coinbase executive called out a recent attack on bZx to illustrate why he finds decentralized finance to be problematic.
In a series of tweets, Lee explains how a decentralized finance app can be shuttered by a centralized entity. Plus, the only way to reverse a hack on a DeFi platform is to add more centralization.
“This is why I don’t believe in DeFi. It’s the worst of both worlds. Most DeFi can be shut down by a centralized party, so it’s just decentralization theatre. And yet no one can undo a hack or exploit unless we add more centralization.
So how is this better than what we have now?”
The recent incident involved a reported attack on the Ethereum-based bZx protocol, a DeFi product that allows users to short, leverage, borrow and lend several cryptocurrencies.
To remedy the attack, the bZx team decided to intervene, revealing the ability to pause the system and use an admin key.
“There is currently 600k of wBTC collateral left by the attacker. We will be using this to stream interest and exit liquidity to existing iETH holders. This will be done using our admin key. This is an extremely difficult decision for us that we don’t take lightly.”
“Borrowing and trading has been paused on the system. Even when we move to the bZxDAO model, there will continue to be a pause button available to the executives. However, when we move to the bZxDAO, there will be a refractory period on the use of the pause button.”
Despite the explosion of transactions in the decentralized finance movement, which now has over $1 billion locked up in crypto assets, Lee pans DeFi across the board on all platforms.
DeFi doesn't work on any platform.
— Charlie Lee [LTC?] (@SatoshiLite) February 16, 2020
“I don’t think it will work in practice. Truly decentralized finance, that is. Complexity will always lead to bugs and exploits. And it will always be semi centralized…
I didn’t say people shouldn’t try to do DeFi. I just don’t believe it will revolutionize finance.”
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