Stability and Decentralization: Myths and Legends.
Decentralization is the process of redistributing, dispersing functions, forces, power, people, or things from a central location or governing body.
Stablecoin is a blockchain token whose exchange rate is pegged to a stable currency such as USD, EUR, etc. at a ratio of 1:1.
Introduction
Greetings, dear reader of the May Club channel! In this article I would like to raise a particularly relevant topic of decentralization of blockchain projects and security of your own funds.
I'll start by attaching some news and tell you how to relate to it:
DEX PancakeSwap will block users from ten jurisdictions.
OpenSea and Metamask reported readiness to block users from sanctioned jurisdictions.
Animoca Brands will stop serving Russian users.
USDC issuer will block fiat payments from Russia.
Tether blocked an address with crypto-assets worth more than $1 million dollars.
It is no secret that crypto is associated with decentralization, security and anonymity, but this is only a primary and mistaken impression.
Blockchain technology is just a tool that can be used as variably as your imagination allows.
There are open and closed blockchains. Blockchains that can be influenced by outsiders or be completely independent. Anonymity is not always necessary, nor is complete decentralization necessary.
Blockchain is used in logistics, in voting, in games, in financial systems, in data processing.
And it is worth understanding that each direction uses its own unique functionality: anonymity is not particularly needed in the logistics of wine, and "decentralization" in working with data.
Let's understand what decentralization means.
Blockchain is decentralized because no one can externally affect its operation and rewrite previous transactions, or somehow tamper with them.
But this does not mean that all projects that only use blockchain technology follow (they do not even have to) the principles of decentralization. The simplest but offensive example is NFTs created on the API from Opensea.
In simple words, NFT does not contain an image, but a link to that image and its adjacent data (e.g., rarity). That is, if the service containing this data goes down, YOUR NFT will not be displayed on Opensea. And these services are not that decentralized.
Decentralization and Stablecoins
A more pressing example: blocking the ability to move your own tokens. How is this possible in a decentralized system?
It's simple:
Although the interaction is built on smart contracts in the "correctness and stability" of which you cannot interfere, you can create conditions in advance in which you can do something specific.
When farming on Pancakeswap, the developers can change the reward per block for specific pools depending on the situation and demand. (In the screenshot Multiplier 40, they can do 140, 1, e.t.c.) But they can't interfere with the process itself, for example, through the same contract to charge someone more than what they intended.
On a similar principle, the contracts of a number of steblecoins: $USDT, $USDC, $BUSD, $FUSD, and other "centralized" steblecoins have a similar function to Punkie's change block reward, the blacklist function, which allows a particular address to prohibit interaction with a steble contract, i.e. the ability to move and receive it.
And precisely because of the blacklist function, these tokens cannot be considered decentralized. By storing funds in these tokens, there will always be a risk of losing access to them.
Maybe the companies behind these tokens wanted to be decentralized, but the format of their device contradicts that, and here's why.
What to use and what not to use and why?
$USDT Centralized Stablecoin. Capitalization $79,733,897,183. https://tether.to/ Secured by the company's physical financial reserves. Net foreign currency reserves of about $4,200,000,000. The rest of the collateral is short-term debt issued by corporations, negotiable short-term deposits issued by financial institutions, securities, loans and investments in other cryptocurrencies.
In simple words - the work is connected with banks, and therefore can not be fully decentralized, if it will strongly contradict the global movement, will receive a denial of support = lose credibility.
Risks: Smart contract has a blacklist mechanism by wallet number. Risks of global economic deterioration and borrower bankruptcies. Risks associated with U.S. law.
$USDC
Centralized Stablecoin. Capitalized at $52,862,157,605 https://www.centre.io/usdc. Secured by $USD cash and assets of equivalent value held in accounts with U.S. regulated financial institutions. There is no published information on the proportions of $USD and other financial assets secured by the USDC.
Goes against U.S. policy = may lose collateral.
Risks: The smart contract has a blacklist mechanism by wallet number. Risks of worsening global economic conditions. Risks associated with US legislation.
$BUSD
Centralized Stablecoin. Capitalization $17,937,009,404. https://www.binance.com/ru/busd . Emits token and holds reserves https://paxos.com/busd/ . It is backed by $USD cash and U.S. government debt. No information on the ratio of $USD to debt is published.
Goes against U.S. policy = may lose collateral.
Risks: Smart contract has a blacklist mechanism by wallet number. Risks of a worsening global economic situation. Risks associated with US legislation.
Decentralized = not so scary, more secure
$DAI
Decentralized super-secured stablecoin. Capitalization $9,723,503,499. https://oasis.app/ . Secured by cryptocurrencies. Current collateral ratio is 160%.
Risks: A third of the collateral as of today, is USDC, thus DAI inherits the corresponding risks. Risk of losing the 1:1 peg to the dollar equivalent due to a sharp change in the value of collateral assets or an error in the smart contracts.
$FRAX.
Decentralized fractional-analytical steblecoin with partial collateral and FXS senorage token. Capitalization $2,908,521,222. https://frax.finance/. FRAX is always mined and redeemed in the protocol at $1 US. The rate is maintained algorithmically. If the market price of FRAX is below the $1 price range, there is an arbitrage opportunity to redeem FRAX tokens cheaply in the open market and redeem in protocol for $1 value. At minte, if the FRAX price is above $1, the protocol reduces the collateral ratio. If the FRAX price is below $1, the protocol increases the collateral ratio.When FRAX is at 100% collateral, the redemption returns 100% of the collateral value. When the protocol goes into the fractional phase, a portion of the collateral value, becomes FXS. For example, when the collateral ratio is 98%, each FRAX will be redeemed for $.98 of collateral and $.02 of FXS value. At the time FRAX mines, $.98 of collateral and $.02 of FXS value is deposited.
Risks: Risk of losing the 1:1 dollar equivalent peg due to an error in the smart contracts. The collateral uses USDC, thus FRAX inherits the associated risks.
There are projects and products in crypto where decentralization makes sense in the first place. There are also projects where decentralization is only indirect because of the link to blockchain.
And to realize this, it is worthwhile to familiarize yourself with the principle of how the project works.
The same Opensea went through the Silicon Valley startup gas pedal YCombinator. The gas pedal helps projects create a quality and scalable product, shares experience and connections, and helps attract investors. And it's visible:
Opensea has created a commercially successful product, but it doesn't really follow the crypto thesis of community orientation and decentralization. The company keeps all the money from commissions. And when the recently engaged CFO announced the issuance of shares instead of tokens, the company was heckled and faced a huge FUD.
In other words, Opensea is an old format company, like most of today's top capitalization startups in the world, they do not bring crypto value to their own community, and at the same time they are very dependent on the world environment. That is, you can use them, but the company can limit your access, take away your images, and you as a user get nothing, from the experience of using it.
The opposite example of LooksRare - the project, at launch, rewarded active users of marketplaces with airdrop. The project has a prescribed tokenomics, a significant part of which is rewarding users. The commission per sale is lower. On Opensea - 2.5% on Looksrare - 2%, and it goes to rewarding the same users who steak $LOOKS.
The team of this project is more of a support staff, which is interested in the development of the product, as the salary is received in tokens.
A real example of this concept:
If a crypto cab service was launched, early users and drivers would get AIRDROP or a special membership for helping the project grow and develop in the early stages.
The users and drivers of the same UBER received nothing.
By preferring cryptocurrency projects, not only do you become a valuable member of the community and receive rewards for doing so, you thereby promote and reinforce the value and importance of the idea of cryptocurrencies in decentralization. <з
A lot of FUD has to do with the possible blocking of Metamask.
I still understand the fear of blocking from the exchanges, it is quite logical: the funds on the exchange, - the funds of the exchange, not yours. So if you hold anything at all, I give the obvious advice - withdraw it.
Back to Metamask and other wallet blockers.
What is a wallet in simple terms:
It stores your private key, with which it provides you with an interface. In other words, it's just a shell. It cannot block access to your funds. But it can block access to the interface.
What to do in this situation? Just choose another one.
You're not going to stay in an institution that refused to serve you, are you?
Summary
The purpose of this article is to rethink decentralization, not everything in crypto lends itself to its principles. But you can support those principles by using projects based on them, by reading authors who popularize them.
Evaluate projects for initial centralization, look at the tokenomics, the Whitepaper, the idea, and the community.