Thread by @DefiIgnas

1/ The USDC depeg has sent shockwaves through #DeFi, calling into question its very foundation.

Where do we go from here?

There are two possible paths forward: 🧵

2/ DeFi is built on USDC liquidity.

It was considered the safest collateral to such an extent that Compound v2 hard-pegged USDC to $1 USD.

Now we've realized that trust in USDC ultimately relies on trusting TradFi banking system and the government.

https://twitter.com/DefiIgnas/status/1634810736076820481

3/ We have two paths moving forward.

Path 1: We rebrand #DeFi to 'on-chain finance.'

DeFi implies decentralization and trustlesness at every level, so even one centralized component compromises the whole protocol.

‘A chain is only as strong as its weakest link.’

https://twitter.com/ChainLinkGod/status/1551336489602011138

4/ In this sense, DeFi is a failure as it's heavily reliant on:

• Centralized stablecoins
• Somehow centralized oracles
• Web2 infrastructure like AWS, RPCs, etc.
• CEXes for fiat on-ramps

If the government decided to shut down (most of) DeFi, they could.

5/ Rebranding to on-chain finance allows to maintain key 'DeFi' benefits:

• Self-custody
• Increased liquidity (larger buy-side market)

• Increased composability (new financial products)

• Single source of truth (reduced reconciliation costs)

Source: ChainLinkGod 🙇

https://twitter.com/ChainLinkGod/status/1551336494731628544

6/ FRAX, for example, is moving towards 'on-chain finance' direction.

Frax's goal is the Fed Master Account (FMA) to get to the Fed as close as possible, thus removing the risk of USDC and failing banks.

Even if FRAX is centralized, it can still benefit from DeFi infrastucture.

https://twitter.com/DefiIgnas/status/1625299845111222274

7/ The DeFi infrastructure can be maximally trustless to eliminate human intervention.

For example, Uniswap's code is immutable, allowing FRAX and other assets to trade on-chain with no censorship.

Yet Uniswap's interface is centralized and vulnerable to regulatory demands.

8/ ALL of DeFi will not be fully decentralized and censorship-resistant.

Rebranding DeFi to on-chain finance solves this confusion and moral dilemma.

USDC can still be a core asset in DeFi, but we need to treat it as a black-box risk asset.

9/ Path 2:

#DeFi community gets rid of every centralized element to make DeFi as Bitcoin-like as possible.

USDC is removed and replaced by unseizable, censorship-resistant collateral, such as BTC or ETH.

10/ This is the direction of Liquity's $LUSD.

$LUSD proved its worth as a safe-haven asset during the USDC crash.

Yet even LUSD is reliant on price oracles that could be tampered with in worst-case situations.

Source: @ChrisBlec

11/ Maker's ultimate goal with DAI is to create a decentralized and Unbiased World Currency.

In its final form, Maker will no longer allow easily seizable collateral.

Heavy reliance on USDC is a wake-up call for MakerDAO to move faster towards this mission.

https://twitter.com/DefiIgnas/status/1564502950034042880

12/ Tornado Cash is an example that full decentralization is possible, but not easy.

TC is a successful privacy tool used to obfuscate senders and recipients with $247M in TVL.

However, the TC developer paid the price by ending up in jail for money laundering charges.

13/ Will many founders risk it for decentralization?

Will users risk interacting with a fully decentralized application if it puts their wallets at risk of being blacklisted?

Of course, not every DeFi dApp will be considered a threat by regulators, but that's always a risk.

14/ How would the DAOs react if the US government required DAI to be blacklisted?

Curve allows permissionless Factory pool creation.

Would the Curve DAO vote to block DAI at the smart contract level or risk being blacklisted itself?

Fully decentralized DeFi is complicated.

15/ I think DeFi can move in both directions at the same time.

Uniswap interface may be censored, but the community is free to create their own UI because the code is immutable and non-discriminatory.

But protocols can't claim decentralization if it's backed by USDC.

16/ This two-way DeFi could be like the internet today.

Most users access the internet via regulated internet services.

While privacy-seeking users can still use the Dark Web that requires specific software or configurations to access.

17/ Overall, USDC crash is embarrasing to DeFi as the risk stemmed from a TradFi bank.

It's now clear to everyone that DeFi isn't as decentralized as we pretended it to be.

So, rebrandig it to on-chain finance would equalize the current reality to what DeFi really is.

18/ It's naive to believe that the term "on-chain finance" will pick up.

But at least DAOs should stop playing the decentralization theater and call things as they really are.

We call it DeFi, but we really mean on-chain finance.

19/ If you liked this thread, I invite you to subscribe to my blog where the best of my content with more details is shared to your email.

ignasdefi.substack.com/p/the-usdc-dep…

20/ What are your thoughts on this?

Follow me @DefiIgnas for more.

Like/Retweet the first tweet below if you can:

https://twitter.com/DefiIgnas/status/1635980042294669312