Why Liquid Loans is ‘True DeFi’

‘DeFi’ stands for Decentralized Finance – and when people first learn about DeFi they often think that, because blockchains are decentralized, then all the cryptocurrencies on the blockchain must be decentralized too.

Nothing could be further from the truth.

The reality is that a huge number of the cryptos in DeFi are massively centralized, and the developers retain a huge amount of control over the coins – even when they’re in users’ wallets. If this seems crazy to you, that’s because it is crazy – crypto was never supposed to be about trusting random people on the internet with your hard earned cash. In fact, crypto was originally designed to be ‘trustless’.

What does that mean? Read on to find out.

The main tenets of DeFi

Before we go any further, you should know the crypto world is divided into two parts – centralized finance (CeFi) and decentralized finance (DeFi).

When you buy crypto on an exchange like Coinbase or Kraken, that’s CeFi. When you swap USDL for PulseChain on PulseX, that’s DeFi. To put it simply, if you hold the 12/24 word seed phrase to an address (rather than an email/password login) then you’re in DeFi.

Now let’s take a look at the main tenets of DeFi.

Trustlessness – In DeFi, there are no intermediaries, meaning no banks, institutions, governments or middlemen handling your money.

Transparency – The code that makes up the blockchain (and all the assets and contracts that live on it) is always viewable, as are all blockchain transactions.

Globality – Geographic borders present no problem to blockchains.

Decentrality – Operations are not reliant on, nor can they easily be impacted by, a minority of users.

Admin keys – the key to true DeFi?

Or perhaps that should be ‘Admin keys – the lack thereof is key to true DeFi’, because admin keys are where many supposedly “DeFi” projects fall down. Let’s take a look at USDT for example.

If you send $100 of USDT to a friend on the other side of the world, is that transaction trustless, transparent, global and decentralized? Yes. So USDT is true DeFi, right? Wrong.

While the transaction was trustless, USDT itself is not properly trustless because the company behind USDT, Tether, retains admin keys that can be used to freeze any address they want at any time. This happened in December 2021 when Tether froze over $160M of USDT on Ethereum.

For this reason, USDT is not properly trustless – and nor is USDC, Solana, Magic Internet Money… and the list goes on. But there’s more to true DeFi than the absence of admin keys – we can’t forget DAOs.

The danger of DAOs

If you read our article on admin keys and why they can be risky then you may remember that DAO stands for Decentralized Autonomous Organization. The way most DAOs work is that holders of a particular ‘governance’ token have the right to vote on decisions that will affect the protocol – and because anyone can buy and hold the token, it’s ‘decentralized’.

That’s the idea, but in reality, developers will often hold a huge majority of the DAO token, meaning they retain all the power to make decisions on everything from liquidity to the protocol’s APY and more. Put simply, the presence of a DAO (or admin keys) should be a big red flag to long-term DeFi users investing more than they can afford to lose.

DeFi has given individuals more optionality and lexibility than many people could ever have dreamed of just a few years ago, but the same aspects that make it so powerful can be a double-edged sword. Clichés exist for a reason, and one of the biggest clichés in crypto is DYOR – do your own research. Nowhere is this more essential than in DeFi.

Liquid Loans. True DeFi.

Liquid Loans will launch with no admin keys, no DAO, and code that is completely immutable. The protocol will be trustless, transparent, global and decentralized. It’s how crypto should be. Before deployment, Liquid Loans will be professionally third-party audited and the full report will be made publicly available. In the meantime, learn more about Liquid Loans here.