Crypto lending platforms, DeFi seem to be having an Animal Farm moment

Proponents of cryptocurrency heralded the technology as the dawn of financial freedom and sovereignty for all, trumpeting the mantra of overthrowing the crooked rulers of the planet’s money.

But when pandemic, war, inflation, and recession washed up at the gates of the cryptocurrency castle, the mantra started to fray as residents found crypto accounts unilaterally frozen on lending platforms such as the Celsius Network, Babel Finance and Voyager Digital.

Worse, the administrators of DeFi project Solend attempted to hijack an account holding US$215 million for what they proclaimed to be the greater good. That idea was rejected in a community vote, but only to be followed by another lending platform, CoinFLEX, this week telling its customers they can’t have their crypto back. 

Is this what financial freedom and sovereignty looks like?

The parallels with author George Orwell’s political satire Animal Farm are clear — the farm animals unseat the wicked farmer and proclaim “all the animals are equal” until crisis hits and the pigs take on behavior remarkably similar to the reviled former ruler. 

“Many DeFi protocols came to prominence during a bull market, now they are being tested and haven’t been tested in a bear market or in extremely volatile times,” said Blake Cassidy, the chief executive officer of crypto trading platform Bamboo.

Exactly how decentralized is it?

Arguably the most well-known example of the crypto shutdowns is staking and lending platform Celsius Network, which halted transactions and withdrawals last week citing extreme market conditions.

The firm raised eyebrows by withdrawing 50,000 Ether and 7,000 Wrapped Bitcoin from its Aave position in its core DeFi wallet, as well as transferring US$320 million in digital assets to crypto exchange FTX before freezing withdrawals by customers. 

Cryptocurrency futures exchange CoinFLEX joined the ranks of crypto firms to halt user transactions Friday morning, citing (and stop us if you’ve heard this one before) “extreme market conditions.” 

CoinFLEX declined to comment for this story.

The decentralized autonomous organization (DAO) behind Solend, a Solana-based lending protocol, recently overturned an earlier vote allowing the DAO to take control of a whale’s wallet that was at risk of liquidation. Community members hit back at the initial vote, saying taking over user accounts “sets a terrible precedent.”

While the Solend community members saved the day, the original proposal would seem to be anathema to crypto’s ethos of decentralization and financial freedom. 

Proponents of Bitcoin and blockchain offer its censorship-resistance, such as during the freezing of bank accounts during the “freedom convoy” in Canada and calls to freeze crypto wallets while the sanctioning of Russia for the Ukraine invasion was gathering steam.

Who is in control?

In a recent Op-Ed for Forkast news, Nick Saponaro, CEO of financial blockchain platform Divi Project, said there was only one way to avoid being caught out. 

“To take back control,” he said, “it’s vital that we move away from custodial services that look after our money for us and move to self-custodial products and services that put us in full control of our digital assets.” 

Maybe decentralization isn’t the be-all and end-all, however. 

Ben Caselin, head of research at Hong Kong-based crypto exchange AAX, told Forkast that decentralization exists along a spectrum and that centralized exchanges and firms do have their benefits and drawbacks. 

But users should be aware of what they are involved in. 

“We do need to be more critical of the marketing language,” Caselin said. “It’s very easy to present a project as decentralized [and] permissionless as you can have real ownership, but we already saw over the past year with OpenSea, we saw with MetaMask, we’ve seen it with a few exchanges, there can be these interventions that are a telltale sign it’s not as decentralized [as it might appear].” 

On the flip side, others consider decentralization set up to fail, even if done right, as project creators often maintain outsized influence on the project by holding governance tokens. 

“Decentralization collapses most often due to … humans being humans and the current capitalism model and the way the infrastructure of the internet is set up,” Giles Crouch, chief information officer for business consultancy firm NordSpark, told Forkast in written commentary.  

“In every case with crypto, someone or a few, end up controlling and governing that coin. The business model is at odds with the ideal.”

Divesting from DeFi

While these platforms are failing, capital is fleeing from the DeFi ecosystem as well. 

Total value locked in DeFi has dropped over 60% since the beginning of May from over US$200 billion to just over US$75 billion on Friday, according to aggregation site DeFiLlama. 

DeFi promised to allow people to be their own banks, but with this rate of decline — Caselin called it an “unraveling” — far outpacing the broader crypto market, it begs the question if that’s what people truly want. 

Centralized exchanges have allowed the onboarding of many more people into the industry that would have otherwise not had the understanding, the time or the inclination to set up non-custodial wallets and engage in the deeper elements of the ecosystem, Cassidy told Forkast.

“User experience has always been an issue for cryptocurrency and the infrastructure just isn’t there yet,” he added, “until the sector matures, which could take another five or 10 years, that, you know, these intermediaries or these centralized platforms will still play an important role.”

From his perspective from years in conducting user experience in technology research, which included decentralization, Crouch had an even more pessimistic view of the situation. 

“As for the wider, general public? Very few even understand it or care,” he wrote. “Public distrust is very high right now and it is seen as a speculative market at best by most people.” 

Caselin acknowledges the “convenience factor” may be a hurdle the industry needs to overcome for adoption to become truly mainstream, but counters that is very dependent on a user’s circumstance.

Users in developed economies with relatively stable financial infrastructure may not be willing to go to the trouble to learn about DeFi or other more involved crypto functions right now. However, that may change if frustration with one’s economic situation grows. 

In the meantime, he hears the cries for decentralization and for getting rid of institutions and banks, but recommends a little patience. 

“Maybe in 100 years from now we’ll have this utopia, but I think we need to be a little bit more generous with ourselves as humanity,” he said. “We are currently still in a multi-decade-long process of going digital and understanding some of the parameters of that new type of living.”