Underdelivered or an ongoing journey?

It’s 2023, and decentralized finance (DeFi) has emerged as a major trend in the blockchain and cryptocurrency space, with the rise of protocols and the promise of building a financial system “free” from central government control. Despite its potential benefits, however, DeFi has faced its fair share of criticism for its lack of true decentralization.

Undermining the fundamental principles of decentralization, many DeFi protocols are still subject to centralized control and oversight by a select few. “DeFi is not decentralized at all,” said Samson Mow, former chief strategy officer at Blockstream, in a discussion with Cointelegraph about how DeFi projects are governed by entities that can change the protocols at will.

The decentralization illusion

Decentralized Autonomous Organizations (DAOs) are touted as the future of decentralized corporate governance, operating without a centralized hierarchy. However, DAOs have failed to achieve their intended level of decentralization. A study by Chainalysis showed that less than 1% of all holders hold 90% of the voting power, indicating a significant concentration of decision-making power in the hands of a select few. This finding highlights a critical issue, as DAOs were created to address the issue of centralized power.

Source: Chainalysis

This was exemplified in July 2022, when popular DeFi lending protocol MakerDAO was scrutinized for its centralized decision-making process. A new proposal was presented to the MakerDAO community for the implementation of a new governance structure that would centralize power in the hands of a smaller group of stakeholders, including the project’s largest investor, Andreessen Horowitz.

However, there was considerable community backlash on the grounds that it would undermine the decentralized and democratic nature of the project. This controversy also highlighted the ongoing debate in the DeFi space about the balance between decentralization and efficiency, and the challenges of maintaining a truly decentralized system.

Emerging promise

While there are concerns about the state of decentralization, there is also promise slowly emerging in the DeFi space.

A good example is Canto, a relatively new and rapidly growing layer-1 blockchain solution in the Cosmos (ATOM) ecosystem. The project has recently made waves in the market with its aim to truly deliver on the promise of decentralized finance by providing a secure and scalable infrastructure for building decentralized applications.

Canto is still in its early stages and faces significant competition from established DeFi protocols such as Aave or Yearn.Finance (YFI). However, Canto’s unique architecture and focus on true decentralization has caught the attention of many in the cryptocurrency community. The project has been successfully launched without a token pre-sale, official foundation, equity rounds or venture capital funding. Also, Canto’s goal is to build a “free public infrastructure”, which means that its decentralized exchange (DEX) cannot issue its own tokens in the ecosystem, unlike Uniswap (UNI) and SushiSwap (SUSHI).

Due to the project’s promise to build an accessible, transparent and fully decentralized ecosystem, many crypto and financial platforms such as XGo are displaying Canto’s own native token, CANTO.

A strong foundation and trust in society is important

Of course, projects can have strong missions, but the core of a protocol lies in its foundations and the trust society has in it. For example, in 2020, Uniswap, the highly regarded Ethereum-based DEX with a strong mission to promote financial freedom and inclusion, faced harsh scrutiny when the first governance vote on the platform failed despite receiving 98% voter support.

This failure raised questions about the strength of Uniswap’s foundation and governance structure. Despite a strong mission, a failed governance vote highlights the importance of a solid foundation and governance structure to ensure the success and sustainability of a project.

Emerging projects like Canto once again boast an impressive array of developers and have the trust of the DeFi community to support their talent. According to the pseudonymous “Spector”, lead developer at Alto, a free public NFT marketplace on Canto, it would be “interesting to try a feeless marketplace that monetizes via Canto’s CSR (contract assured income) while respecting the royalties set by creators .”

Spector also praised Canto’s core contributor Zak Cole, with whom he has worked, proclaiming Canto an “ideal sandbox for new ideas, with the expertise of Zak and other core contributors driving innovation in the blockchain space.”

DeFi needs to reorient itself

As DeFi continues to gain popularity, the debate surrounding true decentralization will remain ongoing. But as projects begin to turn their focus towards creating a truly decentralized platform that is accessible and transparent, the promise of DeFi is getting closer.

This shift towards decentralization will help create a fairer and decentralized financial system, paving the way for a future where DeFi is a viable alternative to traditional finance. As the DeFi space gains recognition and traction, it will be interesting to see where the ideal sandbox will – or rather could – go.