DeFi investments frequently require trust in an environment optimized for trustlessness.

• One of the core selling points for cryptocurrency is security, the so called cryptographic security. Yet most of the centralized investment products require you to sacrifice the security of your assets to participate in the project and earn yield or profit.

This is what I call the cryptocurrency paradox.

• Your cryptocurrency assets are by definition protected by cryptography while they are in your wallet. You know that 22 character alphanumeric password you need to move your assets. A password so secure it would take a computer a 100 years to your passsword?

But most centralized exchanges and centralized investment projects require you to send your cryptocurrency from your wallet to their wallet.

This means your crypto is now not protected by your 22 character password, and not under your control.
This is the crypto paradox:
The whole security set-up here is that your keys secure your assets. But centralized exchanges or centralized investments require your crypto to be deposited in a wallet they control.
This is the security flaw underlying investor losses in projects like Three Arrows Capitol, Celsius and even Gemini Earn to name a few.

How crazy is that?

The cryptocurrency cryptographic security system has to be bypassed to participate in these investments.

So now you have to trust them, in a system which is optimized for trustlessness…

… which defeats the whole purpose of being here and often results in misuse of customers funds and at times outright theft.

In the beginning of my crypto journey…

When I first started learning about cryptocurrency I understood this, but I didn’t actively think about it until I got involved with DeFi and slowly started to realize how important a concept this is, as I watched hacks, rugpulls and other ways investors were exploited in this crypto financial market.

But by watching people lose their cryptocurrency in so many situations where investors lost the crypto they transferred to someone else’s wallet I realized that this is a special situation which the majority of investors are unprepared for because we are use to the highly regulated trust institutions of TradFi.

We are trusting people like we can trust them in TradFi or traditional finance settings where there are rules and regulators who enforce the law and put people in jail for breaking those laws.

We have to realize early in our cryptocurrency investing journey that we are our only protection.
When you invest in crypto you are your security officer, security regulator and security enforcer.

This is cryptocurrency, it is trustless, transparent and you are autonomous; fully in control of your assets and pseudo anonymous. But with this great power comes great responsibility. The responsibility to protect your assets.

The problem with centralized blockchain based investment businesses.

• While we would all like to invest in decentralized investments, most of the available ones are hybrids of centralization and decentralization.
• That is the majority of what we have to deal with, purely centralized investments or hybrids of centralization and decentralization.

Last Words

• I am not saying that all these systems are bad..
• Nor am I saying all the founders are untrustworthy…
• But what I am saying is understand that once your assets leave your wallet, and it’s not for a trade, exchange or purchase, you have entered into a Trusted Agreement and your relying on someone to do the right thing.
• So avoid situations where you don’t know who you are trusting, or make sure they deserve your trust.

@shortsegments