DeFi. The benefits of decentralization
We designed EYWA to be as decentralized as possible because we understand why it matters. Decentralization is not only about democracy and empowering users, it also guarantees security! In this article we would like to explain why we strive for decentralization and what the advantages are.
DeFi's mission is to eliminate centralized intermediaries in financial transactions, whether it is an exchange, insurance or a loan payment. The very name "decentralization" contains the essence of this phenomenon: when users make transactions by transferring assets to each other (p2p-transactions), the third party is not another person who can cheat or make mistakes, but rather an automated system. It is decentralized and cannot be influenced by any individual or group, preventing acts such as stopping its operation or committing fraud.
DeFi is evolving, and as it is evolving, there is a need for new support services, such as cross-chain. DeFi was originally created as a system within the Ethereum blockchain. Later the technology began to scale and moved beyond a single blockchain, beginning to take root in blockchains with different structures. At first, it had the characteristics of a single-chain (a system operating within a single blockchain) and then it became a multichain (can operate in different blockchains). The next development stage is cross-chain, which provides the ability not just to transfer assets from one blockchain to another, but by transferring one asset in one blockchain and receiving the other asset in a different blockchain.
Talking about cross-chain in the context of DeFi, it is impossible not to mention that the more decentralized the system is, the more secure it is! The same can be said about blockchains: the more decentralized and therefore secure they are, the harder they are to manipulate.
The largest blockchains by capitalization and the most popular in the world are the most decentralized! Because everyone understands that the more centralized it is, the more vulnerable it is to manipulation by some narrow group of individuals and the less secure and more fragile it is. In professional terminology, more decentralized blockchains are called antifragile.
They are less prone to the collapses that occasionally happen to centralized systems. At such times, every time there is a so-called "black swan": an event that no one could have predicted. For example, the financial crisis in the United States in 2008. Lehman Brothers bank goes bankrupt within days, declares bankruptcy and fires all its employees. When there is a collapse of crypto companies it seems like a black swan-type event, because these systems are centralized and fragile.
There have been many such collapses in 2022, the most popular being FTX. Before this, Terra created its own UST algorithmic stablecoin and Luna token, and then crashed for billions of dollars. It has prompted a number of other collapses. The collapse of Three Arrows Capital, one of the oldest crypto funds. The collapse of the Celsius Network project, an institutional centralized loan protocol that was tightly linked to the USDT Tether stablecoin issuer. They were all centralized, linked to each other and failed, collapsing one after another like dominoes.
This brings us to another benefit of decentralization: the more truly decentralized projects there are in the market, the more resilient and antifragile each of them will be! Despite their tight interconnection, the risks of cascading collapse become lower.
One can conclude that decentralization firstly contributes to greater safety of the project. Secondly, it reduces the risk of its collapse. And thirdly, it positively affects the safety of other interconnected projects on the market!
What other advantages of decentralization do you know?
