We’ve all heard about DeFi, the decentralized financial system that’s seen an explosion of growth over the past few months. But are these solutions really trustless? Let’s take a closer look at four examples of how DeFi protocols work, what they’re trying to achieve, and if they’re as trustless as we’ve been told.
Starting With The Basics
It’s essential to understand what trustlessness means and how it applies to DeFi.
Trustless:
- It does not require any trust in the system or provider, which means that the value of your assets is based on objective mathematical rules.
- Nobody can access your keys or steal your funds.
- You have complete control over all management, storage, and access permissions decisions.
The DAI Stablecoin
One of the most popular DeFi applications is DAI, a decentralized stablecoin that allows you to use Ether as collateral to create a stable token.
The Dai Stablecoin is trustless because no central party controls it. Instead, it relies on immutable smart contracts and run exactly as they were programmed. There is no third-party intervention or censorship from anyone else.
The Uniswap DEX
Uniswap is a decentralized exchange (DEX) launched in November 2018 by the team at Uniswap. It is trustless, meaning users do not have to trust their funds to any central party or organization. The DEX uses smart contracts to facilitate trades between users and their peers. These smart contracts handle all the details regarding crypto asset trading.
In contrast to traditional exchanges or even centralized DEXes, Uniswap’s wallet contract does not store any funds whatsoever. Instead, it merely facilitates interactions between two parties: one requesting an order fill (buyer) and another executing said order fill (seller).
Decentralized Lending Protocols
There are many lending protocols. Each one serves as a way to borrow and lend money. However, they’re not trustless because they rely on intermediaries handling your account’s funds. If those intermediaries go away, then so do your funds.
Using a centralized service like this is fine if you don’t mind losing access to your money if something happens to the platform. However, most decentralized lending protocols aren’t for you if you want 100% control over your crypto assets at all times.
Thankfully, some exceptions operate as a fully trustless lending protocol. Always analyze and research protocols before making financial commitments.
The Synthetix Network
The Synthetix Network is a decentralized exchange protocol that allows users to trade on-chain assets and derivatives. A trustless DEX like the Synthetix Network does not rely on a centralized authority to manage the exchange. Instead, it allows users to self-execute their trades directly from their wallets.
We can paint a picture of trustlessness and how far along DeFi protocols are in achieving it.
To understand what trustlessness is, we must first understand the concept of trust. Trust is the belief that another party will act in a certain way or fulfill their obligations. It is optional to trust someone with your assets at all times. Instead, it is only necessary for them to be trustworthy when you need them to be.
In other words, you do not need someone or something else holding onto your assets at all times. Instead, you can use a service to control those assets yourself. It is a way to establish self-custody over crypto assets.
Conclusion
DeFi is still in an early stage of development, but we have learned that it’s possible to move away from trust-based systems. Instead, developers are building decentralized protocols and applications that give users more control over their funds and data.
The next few years will be exciting as new projects emerge, so stay tuned!
The post Is DeFi Really Trustless? appeared first on CryptoMode.
