Forward the Original Title: Is DeFi Decentralized? Does It Even Matter?

DeFi was born to create an open, permissionless, and trustless financial system. Early projects like MakerDAO, Uniswap, and Compound fully embraced this ethos, with community governance, transparency, and self-custody. But as DeFi has grown into what it is now, I’ve got to ask: is it still decentralized? More importantly, does it even matter? And what can you do to work your way around it?

A lot of people on CT weren’t around for the birth of DeFi in 2017/2018 or even DeFi Summer in 2020. Back then, decentralization was everything. We cared about the tech. We checked contracts for rugpulls or custody risks and celebrated the security experts who found vulnerabilities.

People who trusted centralized institutions like BlockFi, Celsius, Nexo, and Genesis? They were normies. They couldn’t surf the DeFi wave, and when those centralized entities failed, the devil came to collect. Their users were left to pick up the pieces and enter into multi-year, incredibly expensive bankruptcies. This only reinforced our disdain for centralization.

Now? Most people in the space don’t have that same PTSD from centralized system collapses. So, it’s not shocking that this new wave of DeFi projects has mostly abandoned decentralization. Decentralization is a trade-off. You’re giving up efficiency for security. And if people don’t value security, why would projects make that sacrifice?

Decentralization is a spectrum

We don’t have a unique definition for what constitutes a “decentralized” system. So I’ll try to formulate one myself. What constitutes a “decentralized” system?

• You hold direct custody of your assets: if the system rules allow it (e.g there’s enough liquidity in the money market, a cooldown period has expired, etc), you should be able to withdraw your funds without requiring an external authorization.
• Your funds are not freezable: the system operator cannot freeze or confiscate your funds. You remain in total control
• The system is not upgradeable, or at least has a long timelock: Immutability guarantees that the rules in which you entered the system will remain so.
• Decentralization of the governance layer: is the system that you are using fairly decentralized? Has the blockchain participants colluded before to block or freeze somebody’s funds? Are there multiple nodes? Is the stake distributed? Are validators actually validating or are they just blind signing what the foundation says? Are they in control of the whole system? (i.e stage 0 L2)
• External factors: does the system rely on the intervention of a centralized third party to properly function? If your money market depends on an oracle that’s set by a centralized risk curator, then your funds depend on the honesty of that curator.

So let’s see how some protocols fare in this litmus test.

As shown by the chart, older projects rate higher on the decentralization spectrum, while newer projects do not do as well. This is a clear indicator of market preference.

In 2024, centralized on-chain investment funds accumulated $8B in deposits, DAI/USDs grew by 2.3% and decentralized stablecoins like LUSD dropped by 65%

https://makerburn.com/#/charts

https://coinmarketcap.com/currencies/liquity-usd/#markets

https://coinmarketcap.com/currencies/ethena-usde/ / https://coinmarketcap.com/currencies/ethena-staked-usde/

I grew up in this space with decentralization as the ethos, so adjusting to this new meta hasn’t been easy. I haven’t totally let go of it, but I’m learning to adapt. Below, I’ll break down some examples and share tips to survive without getting rekted.

Examples of “DeFi” Centralization

1. Hyperliquid: An on-chain, no-KYC centralized exchange. You send money to an address on Arbitrum and get USDC on their platform. They control both the funds and the platform. The one good thing? Their deposit address is public and verifiable in real-time. You can read more here.
2. Ethena: An investment fund that does -mostly- the basis trade. Whitelisted users send them money, and those whitelisted users sell LP shares on the secondary market. Ethena controls all the funds, payouts, and redemptions. USDe is not freezeable. You can read more here.
3. Usual: Similar to Ethena, Usual runs a fund holding T-bills. They set the rules for redemptions and asset pricing. Usual gave us a taste of centralization risks by unilaterally deciding on a redemption price for their locked bonds, while Gauntlet and MEV Capital, by vox populi, hardcoded their oracle to $1. You can read more here,
4. MakerDAO: Maker is now an investment fund of funds run by a DAO. The community votes on fund allocations, which include investments in centralized custodians and projects like Blocktower Andromeda and Ethena (via a hardcoded Morpho pool). You can read more here.
5. Uniswap: Uniswap checks out as completely decentralized, especially when on Ethereum mainnet. You remain in total control of your funds, you rely on no external data and contracts are immutable. Hats off to Uniswap.

These setups come with big trust assumptions and a lot binary risks. You’re either rugged, or you’re not. We haven’t seen any major collapses yet, but when one of these centralized projects goes down, it’s going to be brutal: frozen redemptions, legal battles, and sky-high fees (e.g FTX estate).

How to minimize risks

1. Loan against risky collateral: Don’t hold risky centralized assets outright. Use them as collateral for loans instead. If the risky asset declines in price, you bear none of the losses while acquiring similar yield. DeFi will always be a place for leverage, so there will be no shortage of venues in which to lend against these risky collaterals.
2. Withdraw during market turmoil: When things get dicey, pull your funds early. You’ll eat gas fees and lose a few basis points (e.g., 100% APY is just 18 basis points in 24 hours), but it’s better than losing your entire stack.
3. Set minimum risk premiums: Decide upfront what’s worth the risk. If a risky investment offers 2-3x your benchmark, maybe it’s worth it. But if that gap shrinks to 30%, don’t get greedy.
4. Monitor on-Chain activity: Keep an eye on big transfers or insider moves. For example, if you’d tracked the USD0++ rug, you could’ve exited at $0.99 instead of $0.9251. Nansen smart alerts work great here.
5. Understand the risks: Map out what you’re underwriting. Know that beyond risk, you’ll need to actively monitor positions. Gas fees can explode during downturns (300-400 gwei), so size appropriately. If size is an issue, stick to Layer 2s. More info on proper market neutral management here

Conclusion

Decentralization was DeFi’s key appeal. Now, many projects have traded it for efficiency and mainstream adoption. That definitely dilutes the original vision, but it’s also the reality of the market.

I do believe that things tend to centralize over time. We see an initial state of centralization, then a cambrian explosion of user initiative, and finally we end up with centralized large institutions ruling our every movement. We are slowly transitioning to a world of on-chain centralization. Centralized stablecoins are heavy market favorites, and decentralized projects end up centralizing as time goes by to remain relevant. Decentralized money markets include custodial collateral to boost profits, decentralized stablecoin projects peg their coins to fiat-backed coins in order to stay stable, and dexes do away with decentralization altogether to be efficient. The 2022/2023 wave of bankruptcies was a speed bump on our way to centralization. The only way to prevent this, at least in the short term, is for the current centralized cabal to run head-straight into the wall and rug everyone.

In ancient Rome, after killing the republic Octavian (Augustus) ruled for 41 years as a dictator. It was such a long time, and its rules and incentives were so ingrained, that when Octavian died, the senate and people of Rome didn’t reclaim their freedoms. They just asked “Who should we trust next?” I hope this point of DeFi is still far away, and we can do away with tyrants for the time being.

So, is DeFi decentralized? Not really. Does it matter? That depends. If you’re quick to move before all these newly formed centralized institutions come crashing down, you can make good money. If you are in the money management game, leave your ideals at the door.

Either way, staying informed and ready is your best way to survive this game.

Disclaimer:

1. This article is reprinted from [Santisa]. Forward the Original Title: Is DeFi Decentralized? Does It Even Matter? All copyrights belong to the original author [Santisa]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
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