Decentralization Could Cure Crypto’s Current Ills

The crypto industry is troubled by two challenges.

First, the market downturn — a temporary, albeit painful, challenge.

The second is the loss of faith in industry leaders, a much more foundational and lasting challenge.

Both can be solved by a move to DeFi. The result will be a return to the very reason crypto exists: truly independent finance.

Let’s be direct about why custodial solutions are failing. Crypto companies marketed themselves as industry experts and claimed they were experienced investors. They offered well-above market interest rates to entice retail deposits. 

The reality is that — just like so-called ‘professional’ stock pickers — not all of these ‘experts’ know how to invest money any better than the average user. In fact, according to the Wall Street Journal, 85% of professional investors failed to beat the market average in 2021, up from around 65% the previous year.

For example: Voyager became a publicly traded company in 2019, claiming that “being public creates an environment that furthers trust and transparency while providing investors with an opportunity to invest directly in Voyager stock.” 

The problem is that Voyager lacked real transparency. It failed to tell users it had loaned an estimated $650 million in their funds to hedge fund Three Arrows Capital (3AC). When 3AC defaulted on its loan, the user funds that fronted it in the 3AC loan disappeared and Voyager began denying users access to their money. 

That’s why it’s critical the entire crypto community remembers why the community exists in the first place: We hated expensive, greedy intermediaries who took investors’ funds but left them holding the bag when things went awry.

Future crypto investors should eliminate these centralized, custodial companies.

That brings us to the future of crypto: DeFi (decentralized finance).

With a DeFi wallet, users — not third parties — maintain control of their funds. There aren’t bank runs because users already have their funds in their possession, either on their hard drive, their computer or their phone. 

DeFi is still in its infancy, though, and the majority of currently-available Web3 wallets are confusing, even for advanced users. Users bounce between wallets or DeFi protocols, often unaware of their gaping security flaws. Other investors feel frustrated by the outdated technology and poor user experience.

To gain traction and trust, DeFi-powered Web3 wallets need to have the easy feel of a centralized service. Users would then get the benefits of DeFi — from control over their funds to high interest rates — without the typical DeFi protocol headaches.

Developing effective, usable decentralized tools will not only help our industry endure these custodial nightmares, but also help the crypto community rediscover what inspired the creation of crypto in the first place. 

DeFi is the way we can re-instill trust in the technology and welcome in the next bullish crypto spring.

---

Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the On the Margin newsletter.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.