Are Your Funds SAFU? DeFi Protocols Vs. CeFi Platforms

What Is The Safest Staking Platform? DeFi Vs. CeFi Risks - Your Funds Are Not Always SAFU

By Cryptofab | Cointune | 23 May 2022

As LUNA, UST and Anchor Protocol crashed, you may wonder if it is better to invest in DeFi (Decentralized Finance) or CeFi (Centralized Finance):

  • DeFi protocols are supposed to be decentralized, i.e., handled in a trustless way. In theory, there would not be any centralized authority deciding about the lending and borrowing rates or the reward distribution. Anchor Protocol was an example of DeFi protocol. As everyone knows now, its weakness was its treasury which had to be regularly refilled by Do Kwon himself... Therefore, although there was no centralized authority for the protocol itself (which was a smart contract, i.e., a few lines of code like for all the DeFi protocols), there were single points of failure, e.g., treasury. 
  • CeFi platforms are centralized, i.e., handled by a company. A few examples of CeFi platforms are, Celsius, Binance vault, Coinbase... You need to trust the company handling the platform to invest your funds in it. All these platforms will say your funds are SAFU. But how true is it?

What is the safest option: DeFi or CeFi?

Only the time will tell us which ones were really safe. However, we can already assess the risks:

  • DeFi protocols risks are the following ones:
    • Blockchain centralization: although blockchains are supposedly decentralized, they often rely on a few validators, e.g., 130 for Terra (LUNA). Therefore, it might be worth investing into the most decentralized blockchains. However, it comes with some hurdles:
      • Bitcoin (BTC) is the most decentralized one, but it does not offer smart contract capability and therefore DeFi options.
      • Ethereum (ETH) is the second most decentralized one, but gas fees are so high that it is not worth using it if you invest less than 100k$.
      • The other major layer-1 blockchains like Solana (SOL) or Elrond (EGLD) are less decentralized and can sometimes suffer from outages.
      • Ethereum layer-2 chains (e.g., Arbitrum, Optimism) or sidechains (Polygon) can be good trade-offs - the complete list is on
    • DeFi protocol rug pull: it is crucial to check the team behind the protocol and the audit of the protocol (if any) to ensure they cannot rug pull.
    • DeFi protocol hacking: it is also crucial to check completely the audit reports or the code itself if you can, and to assess the exploit risks.
    • Lack of liquidity or cash flow issues: although the protocol can be fully safe, if there is an issue with treasury like for Anchor, it can collapse...
    • Wallet hacking: using DeFi with a desktop wallet (e.g., Metamask) comes with some risks, especially if you use it without any hardware wallet.
  • CeFi platform risks are the following ones:
    • Scams: before investing money into a centralized platform (e.g., website or mobile app), you need to investigate to ensure it is not a scam.
    • DeFi risks: how do you think Celsius or Nexo offer good interest rates on USD? They also invest in DeFi protocols like Anchor for instance...
    • Bankruptcy: most of these CeFi platforms lost huge amounts due to UST crash but did not fully admit it. A blackswan event is likely to occur.
    • Rule changes: as CeFi platforms are centralized, they can change the rules when they want without asking you, without releasing your funds.
    • Regulations: if new regulations are decided in your country, it will target the CeFi platforms at first, because it is easier to control than DeFi.

In summary, both options include risks. However, as CeFi risks also include DeFi risks, it will be less risky to use DeFi if you check the team & protocol.

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