Author: Santisa; Compiler: Block unicorn

Decentralized Finance (DeFi) was born to create an open, permissionless and trustless financial system. Early projects like MakerDAO, Uniswap, and Compound fully embraced this philosophy, with community governance, transparency, and self-custody. However, as DeFi has grown to the scale it has today, I have to ask: is it still decentralized? More importantly, does it really matter? And what can you do to solve this problem?

On Crypto Twitter (CT), many people did not experience the birth of DeFi in 2017/2018, and even missed the DeFi boom in 2020. At that time, decentralization was at the core of everything. We care about the technology, checking smart contracts for fraud or custody risks, and applauding security experts who find vulnerabilities.

Those who trust centralized institutions like BlockFi, Celsius, Nexo and Genesis? They are also ordinary people and cannot ride the wave of DeFi. And when these centralized entities collapse, their users are left to pick up the pieces and enter years of costly bankruptcy proceedings. This only furthers our aversion to centralization.

And now? Most participants have not experienced the trauma of a centralized system collapse. Therefore, it is not surprising that most new DeFi projects have abandoned decentralization. Decentralization is a trade-off, you sacrifice efficiency for security. If people don't take security seriously, why should projects make such sacrifices?

We do not have a unique definition of what a “decentralized” system is. So I'll try to formulate one myself. What constitutes a “decentralized” system?

Direct custody of one's own assets: The custody right of an individual to hold assets directly. If the system rules allow it (e.g. there is sufficient liquidity in the funding market, the cooling period has expired, etc.), you should be able to withdraw your funds without external authorization.

Personal funds cannot be frozen: The operator of the system cannot freeze or confiscate your funds. You always maintain full control over your assets.

The system is not upgradeable, or at least has a long lock-in period: immutability guarantees that the rules will remain the same when you enter the system.

Decentralization of the governance layer: Is the system you are using decentralized enough? Have blockchain participants ever colluded to freeze or block someone’s funds? Are there multiple nodes? Are interests dispersed? Do validators actually perform verification, or do they just blindly sign the foundation's instructions? Do they control the entire system (e.g., L2 at stage 0)?

External factors: Does the system rely on the intervention of a centralized third party to function properly? ifIf your funding market relies on oracles set up by a centralized risk curator, then your funding depends on the integrity of that curator.

Next, let’s see how some protocols perform in this test.

As shown in the figure, older projects scored higher on the degree of decentralization, while newer projects performed less well. This clearly reflects market preference.

In 2024, centralized on-chain investment funds attracted a total of $8 billion in deposits, with DAI/USD growing at a rate of 2.3%, while decentralized stablecoins such as LUSD fell by 65%.

I grew up in an environment where decentralization was the concept, so adapting to this new trend was not easy. I’m not giving up on decentralization completely, but I’m learning to adapt. Below, I’ll give you some examples and share some tips for surviving in this environment without getting wiped out.

Hyperliquid: an on-chain, centralized exchange that does not require KYC. You send funds to an address on Arbitrum and receive USDC on their platform. They control the funds and the platform. The only advantage is that their deposit addresses are public and can be verified in real time.

Ethena: An investment fund that mainly conducts basic transactions. Whitelisted users send them funds, and these users can sell LP shares on the secondary market. Ethena controls all funding, payment and redemption operations. USDe funds cannot be frozen.

Usual: Similar to Ethena, Usual operates a fund that holds Treasury bonds. They set the rules for redemptions and asset pricing. Usual showed us centralization risk by unilaterally deciding the redemption price of locked bonds, while Gauntlet and MEV Capital hardcoded their oracles to $1 via polls.

MakerDAO: Maker is now an investment fund run by a DAO. The community votes on fund allocations, including investments in centralized custodians and projects such as Blocktower Andromeda and Ethena (via the hard-coded Morpho pool).

Uniswap: Uniswap is considered fully decentralized on the Ethereum mainnet. You maintain full control over your funds, no reliance on external data, and smart contracts cannot be changed. Here we pay tribute to Uniswap!

These setups bring with them huge trust assumptions and many binary risks. You either get "harvested" or you don't. We haven’t seen any major crashes yet, but once these centralized projects go down, the consequences will be devastating: redemption freezes, legalLitigation and sky-high fees (e.g. FTX assets).

Lending with risky collateral: Do not hold high-risk centralized assets directly. Instead, they serve as collateral for the loan. If the price of a high-risk asset falls, you won't bear any losses while reaping similar gains. DeFi will always be a leveraged place, so there will be no shortage of places to lend against these high-risk collaterals.

Withdraw funds during market turmoil: When market turmoil occurs, withdraw your investment as early as possible. You may pay some gas fees and lose a few basis points (for example, a 100% annualized return may only equal 18 basis points in a 24-hour period), but it's better than losing all your money.

Set a minimum risk premium: Decide in advance which risks are worth taking. If a high-risk investment offers 2-3x a baseline return, it may be worth it. But if that gap shrinks to 30%, don’t get greedy.

Monitor on-chain activity: pay close attention to large transfers or internal transactions. For example, if you tracked the USD0++ runaway event, you could exit at $0.99 instead of $0.9251.

Understand the risks: Be clear about the risks you take. Know that in addition to risk, you also need to actively monitor your positions. During market downturns, gas fees may skyrocket (300-400 gwei), so positions should be adjusted appropriately. If positioning is an issue, choose Layer 2.

Decentralization was once the core attraction of DeFi. But now, many projects have abandoned decentralization for efficiency and mainstream adoption. This certainly weakens the original vision, but it is also the reality of the market.

I do believe that over time things will tend to become more centralized. We see an initial state of centralization, then a Cambrian explosion of user initiative, and finally we see large centralized institutions dominating our every move. We are slowly transitioning to a world that is centralized on the chain. Centralized stablecoins are a big hit in the market, and decentralized projects will eventually become centralized over time to stay relevant. Decentralized currency markets include custody of collateral to increase profits, decentralized stablecoin projects peg their tokens to fiat-backed tokens for stability, and decentralized exchanges remove decentralization entirely to Improve efficiency. The wave of bankruptcies in 2022/2023 is an obstacle on our path to centralization. At least in the short term, the only way to prevent this from happening is to let the current centralized group hit the wall and eventually "harvest" everyone.

In ancient Rome, Octavian (Augustus) ruled as a dictator for 41 years after killing the republic. Over time, the rules and incentives were so ingrained that when Octavian died, the Senate and people of Rome were not free. they justAsking “Who should we trust next?” I hope DeFi is far from reaching this point and we can escape the tyrants for now.

So, is DeFi decentralized? Not really. Does it matter? That depends. If you act quickly before these emerging centralized institutions collapse, you can make a lot of money. If you're in the money management business, leave your dreams at the door.

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