2022 has not been kind to the crypto world. The recent crypto crash crumbled the crypto industry. Centralized cryptocurrency financial platforms like Celsius, BlockFi, and Voyager Digital announced suspending trading, deposits, and withdrawals, which sparked concern among investors.
Between $1 billion and over $5 billion of investors’ money got locked up in the hands of the struggling companies and are not accessible to the users. Will the main takeaway from this crisis be a shift to the Decentralized Finance (DeFi) market?
The Dangers of Centralization
Mirroring the traditional financial sector, Centralized Finance (CeFi) provides similar services; however, it also allows users to use crypto as collateral instead of fiat money.
CeFi skeptics attributed the current crisis to the core of CeFi – the centralization. When using a CeFi exchange, traders are subjected to the platform’s rules and fees, and generally don’t own the private keys to their on-platform wallets. Trusting centralized providers to be a gateway to decentralized finance has a risk that the company might fail to pay off, even if they initially promised higher yields.
Custodial accounts take away the control from the user, as the companies might engage in risky bets with clients’ funds. User empowerment, privacy, and transparency are the three main pillars of Decentralized Finance (DeFi). The centralized gatekeeper companies should not compromise that.
The Importance of Self-Sovereignty
Compared to CeFi, DeFi platforms use smart contract technology to automate traditional financial tools. Smart contracts can automatically execute transactions once specific criteria have been met. This eliminates the need for third-party involvement in the process. There is also no need to share any personal data to use these services.
Building secure blockchain networks can help maintain anonymity while accessing open and transparent markets. By removing custodial access by third parties on DeFi platforms, users are given options to swap and use their crypto assets freely. Self-custody DeFi solutions will often provide high yields without the risks associated with centralized intermediaries.
Building DeFi Solutions on Bitcoin
In the DeFi industry, there are many exciting non-custodial protocols emerging. Notable examples include Aave, Alpha Homora, Bancor, and Interplay. These projects can be found across various blockchains, although overall interest in building on Bitcoin keeps rising as the most secure and immutable network.
Smart contract layer Stacks and EVM-compatible layer Rootstock open potential in building the next generation of self-custodial solutions on the Bitcoin blockchain.
For instance, Portal, one of the many DeFi solutions built on the Bitcoin network, provides users with a self-hosted wallet and decentralized exchange (DEX), guaranteeing strong security, privacy, and decentralization.
In 2021, Portal raised $8.5 million from investors, including Coinbase Ventures, ArringtonXRP Capital, Tether, and many notable crypto companies and individuals.
The company uses Fabric technology to enable web-scale, serverless infrastructure, and peer-to-peer applications as layers 2 and 3 on Bitcoin. The Bitcoin network can provide the highest level of native security.
The platform facilitates private and off-chain execution of smart contracts and supports asset issuance, swaps, liquidity, and derivatives. In addition, Portal’s approach enables zero-knowledge cross-chain swaps and censorship-proof communication.
CeFi, most of the time, is considered to lead in transaction processing. However, the Portal team claims that their Layer-2 solution is on par with centralized exchange execution speed with the bonus of privacy that DeFi solutions can provide to the client.