Opinion: 8 factors hinder CeFi from integrating DeFi

Editor's Note: This article comes fromEthereum enthusiasts (ID: ethfans)Editor's Note: This article comes from

Ethereum enthusiasts (ID: ethfans)

Ethereum enthusiasts (ID: ethfans)

1. , Author: Calvin Liu, translation: A Jian, reprinted by Odaily with authorization.

2. Last week, I showed my dad how to use Compound.

3. It took me about two hours for him to properly understand the principle and purpose of the following steps:

4. Send USD to a large centralized exchange

5. Complete two-factor authentication (2FA) for your exchange account

6. Swap USD for a stablecoin

7. Swap Stablecoins for ETH

8. Install the Metamask browser plug-in and protect your private key

9. Send stablecoins and ETH back to your own Ethereum account managed with Metamask

10. Learn how to monitor transactions with Etherscan

11. Connect Compound with Metamask

Authorize Compound to use the stable currency of this account

Putting stablecoins into Compound

Finally, start earning interest

There are 11 steps in this! And every step is complicated!

Chances are these things are familiar to you, you've heard something like it or another version.

But DeFi is really complicated and very difficult to use. It needs an earth-shaking improvement in user experience, so that it can truly cross the gap and reach mainstream and retail users.

Just to clarify: This story is for illustration only, not what actually happened to Calvin. The expression above is from @FarmerDeFi

but we can do without

The "big exchange" in the above process can completely abstract the above 4 to 10 steps into a button in a very direct way, so that my dad can reach his seat directly without letting the funds leave the exchange at all. The purpose of enjoying Compound market interest. Exchanges can use code to automate 4-10 steps, and it will be much more expensive, cheaper, and easier.

My dad is the epitome of many potential DeFi users. The collateral value of the entire DeFi field has exceeded 4 billion, and it is still growing rapidly. All of these collaterals (yes, no exaggeration, literally "all") are deposited by users who find the DeFi protocols themselves and figure out how to connect and use them.

Each of these users figured out the 11 steps here on their own, because a protocol like Compound is so useful — and users feel it's worth understanding the steps.

These users may have been guided into the world of cryptocurrencies through centralized exchanges, but they quickly left the exchanges to use DeFi protocols. And judging by the speed of innovation in the DeFi space, they may never go back.

For large centralized exchanges, this should be quite scary. They can "print money", run by some of the smartest people in the world, and are fully capable of integrating DeFi protocols into their services.

After the integration, their users can access DeFi protocols without leaving the exchange at all. However, in such a short period of time, 4 billion assets have left the control of the exchange and flew to a complex, difficult to use, low-end (and want to eat) decentralized trading system.

So, it seems clear that it should be of great commercial value for large centralized exchanges to integrate DeFi protocols into their platforms.

It's also clear that with the money and resources of their magnitude, there is no problem that cannot be solved.

So why not?

At Compound Labs, I spend a lot of time explaining DeFi to centralized exchanges and other financial institutions.

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1. Not familiar with technology

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2. Don’t worry about letting smart contracts manage funds

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3. Worried about being hacked

This is related to smart contract security - all the high asset losses and hacking incidents in the past are negative information for every DeFi project today. Because most transactions are not so familiar with the operation process of DeFi, this uncertainty will naturally make them feel dangerous. People are afraid of what they don't understand. So they prefer the known, safe route.

4. Difficult to upgrade existing infrastructure

Even if they do understand DeFi, there is still a lot of friction to make standard exchange infrastructure DeFi friendly. For example, integrate DdFi to upgrade the private key management and accounting system on a large scale.

Most exchanges use a small number of wallets to hold a large amount of cryptocurrency, and users' assets are collected into a pool rather than in separate accounts. Exchanges use a centralized ledger system to track users' balances and only move funds as a last resort -- for example, when a user withdraws money. If these exchanges now also have to track the status of DeFi interactions, batch package transactions, and pay fees, the requirements for internal private key management and accounting systems will be rapidly complicated.

5. Lack of incentives to innovate business models

All of the above technical difficulties are further magnified by the fact that the business models of exchanges are so superior right now that they have no incentive to venture outside of this core business model. Running an exchange requires a large upfront investment in infrastructure, which then supports an almost unlimited number of new exchange markets at low cost.

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6. Focus on monetizing trading volume

In addition, the business model of most exchanges is only realized from the transaction volume, but not the asset management scale (AUM) to realize the model, but the success of most DeFi protocols is based on the non-depository corresponding indicators of the asset management scale ——that is, TVL (Total Value of Locked Assets)——to be measured. Obtaining AUM and monetizing it to expand the profits driven by transactions has very considerable commercial value, but this is an option outside the natural business model that most exchanges have developed.

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The volume-driven exchange business model, and its current profitability, has spawned a roadmap that requires no progress, no lofty ideals, and no audacity.

It just needs to prevent internal crashes.

In addition, many exchanges operate on a very large scale, with teams distributed all over the world. This means that to make high-risk strategic investments, it is difficult to reach agreement, and it will bring fatal and huge impact. For an exchange, choosing a direction that competitors do not take can be fatal. If you already have a profitable business, why break it?

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8. Legal risk

Finally, there are legal and regulatory risks. Exchanges already operate under the watchful eye of regulation. While it is true that some DeFi protocols are built and launched in the "right" way, fully non-custodial, and compliant, for a large exchange, being the first to eat crabs is still very risky.

Encounter on a narrow road, the brave wins

There are really hundreds of exchanges in the market now. Which ones will we always remember and use until 10 or 20 years later, or even 100 years later, after all other competitors have died?

To find out, I think we should target those who are brave enough, look beyond the incremental benefits of the current route, are willing to accept the challenge of potential growth of 10-100 times, and have the ability to completely change the exchange industry. Not an exchange that elevates the industry a little bit.

The cryptocurrency industry is an exponential growth industry, and if an exchange wants to keep up with the pace of the entire industry, its business must innovate exponentially. It's too early to say "best practice" in the industry - you have to create it yourself.

One is FTX, which has suddenly and extremely aggressively rushed into the DeFi world.

The second story is that both Poloniex and FTX listed Compound Tether (cUSDT) ERC-20 tokens. It is both novel and difficult to discover the product form after integrating DeFi functions into the centralized exchange architecture.

Both Poloniex and FTX took time to deeply understand the working principle of the Compound protocol, and realized that as long as cUSDT is listed, they can provide users with interest rate benefits, because any user who holds cUSDT can enjoy the interest of cUSDT and receive To COMP governance token. This "integration" gains most of the functionality of the Compound protocol, while requiring only very minor adjustments to how Poloniex and FTX work naturally.

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This is the first step in an efficient and low-cost DeFi deep integration method, and it also indicates that although integrating DeFi functions may seem daunting at first glance, there are actually many solutions waiting to be developed.

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For exchanges, DeFi will no longer be just a "feature" that can be used to fill in the corners of their products.

DeFi is an ever-expanding universe of protocols and financial components around which exchanges need to develop an entire strategy.

And strategy can't just be about doing what your opponent does, you either bet bigger or you're out. The bet is what the cryptographic financial system will evolve into in the next 10 or 20 years. It's also how to build a long-lasting business.