Centralized Crypto Lending Firms are to Blame for their Failure

In a recent podcast, Robert Leshner tore into centralized cryptocurrency lending platforms that have been receiving bailouts, insisting DeFi alternatives offer a natural fix.

Centralized Crypto Lending Platforms Operate Like Banks

Robert Leshner, co-founder of Compound Finance, a decentralized money market on Ethereum, said decentralized lending and borrowing protocols guided by smart contracts don’t need bailouts.

Instead, the automation and transparency in their operations are superior. Considering the transparent nature of DeFi protocols on public chains like Ethereum or the BNB Chain, all transactions are available for everyone to track. Furthermore, DeFi protocols have protective mechanisms such as demanding borrowers overcollateralize their loans for a slightly higher interest rate than what lenders get for providing liquidity.

Meanwhile, the opaque nature of centralized cryptocurrency lending platforms like BlockFi, Nexo, Voyager Digital, and the Celsius Network presents systemic weaknesses that have since caused contagion in crypto.

In Robert’s view, the failure of centralized and regulated crypto lending firms to leverage technology inherent in crypto is why they fail. He assesses that though regulated and complying with existing laws, they operate as banks did during the Great Financial Crisis (GFC) of 2008 and 2009.

They’re opaque, run based on the whims of people who are not very good managers, and do not leverage any of the inherent new technological advantages of crypto itself to run their businesses.

Adding,

They are running their businesses in the same way as Wall Street was running itself in 2007. It’s incredibly sad to see people repeat the exact same mistakes when the tools to avoid them are right there in front of their faces.

The Crypto Sell-Off is to Blame

The steep correction of crypto prices has heaped pressure on crypto money markets, especially those offering abnormally high-interest rates.

In early May 2022, UST, an algorithmic stablecoin linked to LUNA, was the first to crack after it became evident that the protocol couldn’t sustain the 18 percent APY they were promising. The resulting de-peg forced the then LUNA Foundation Guard (LFG) to liquidate over $1.5 billion in BTC, further crashing the market.

However, further fears associated with USDT and core stablecoins de-pegging coupled with the FED raising interest rates forced prices lower, causing some centralized crypto lending firms to suspend withdrawals before filing for bankruptcy.