Is DeFi a fully decentralized ecosystem? Well, not really. If you think about it, well-known protocols like Maker DAO, AAVE, Compound, Uniswap, or Yearn are based on smart contracts running on Ethereum.
But did you know that most of those contracts have configurable parameters? For instance, the protocol's fees are dynamic. You can check a few discussions about that in Uniswap [here] or in Yearn [here].
And who can change these parameters? Most of the time is the team behind the project using a multi-signature wallet under a custom hierarchical permission model. So, we are saying that the team can change parameters without asking anyone anytime. That's the human factor we are referring to. So why it's important having a DAO to make decisions on DeFi protocols?
The success of Web3 is more important than the founders' greed, at least with renowned DeFi projects. The aim for the team behind a protocol to succeed is more important, so ruining it won't make any sense. The same reason why Vitalik doesn't sell all his ETH.
Yes, you are trusting the team behind a project when using a DeFi protocol.
So what's the main difference between a centralized and a decentralized crypto project? In my opinion, the main difference is transparency. With decentralized projects, you can check the state of a protocol at any time, look at the collaterals, track the liquidity movements, analyze on-chain activity, etc. You can also check the execution of code by reading the public smart contracts so you know things happen accordingly.
Can you do the same with a centralized project? Maybe in a limited way, like checking the volume or looking at order books, but you need to check everything. The FTX drama is enough to prove this. The internal disaster of this company was beyond anything we have seen before. In contrast, with blockchain technology, you can audit a project's functional parts and check its global health.
But with transparency, decentralized systems also bring trust. You can check a team's wallet activity on-chain executing DAO decisions. Over time, this creates trust between a team and a community.
And in the end, can the team drain money from a protocol anyway? Yes. Will they do it? Probably not.
Maker DAO is considered the first DeFi protocol and has been working since December 2017. Thanks to its decentralized decision-making, it has evolved a lot since then. This would not be possible with a static smart contract, not able to change, yet fully decentralized.
More than any other space in crypto, flexibility is essential for a business to succeed; market conditions change quickly. So having a smart contract with parameters set in stone makes little sense.
Also, one of the essential things is that DeFi and Web3 enable everyone to have self-ownership in a permission-less way. It grants access to anyone, anywhere in the world, with an internet connection to access financial products.
To sum up, DeFi is not a fully-decentralized ecosystem because of the human factor behind the team builders. Yet, teams behind renowned DeFi protocols have stronger motivations than money to keep going on in the space. They have shown that you can audit their on-chain activity in the past years.
And overall, DeFi systems bring transparency, trust, and self-ownership to the table.
It might not seem like a lot at first sight, you may not care about transparency or trust in a system as long as it works, and it's just fine. But as Mariano Conti says: "Decentralization does not matter until it does."
See you at the next FTX drama.
