How is DeFI exactly Decentralized ?

[adaseb]

Ok so I am learning lots about DeFI and NFTs. I am watching videos on how these Defi exchanges work, also reading the user guides and trying to follow the money by looking at the blockchain.

From what I understand. You generally use Metamask and this is used to Connect your Metamask to some Defi exchange you want to use. However this is where I am confused.

In these videos AND from the "getting started" guide, after you connect your Metamask, you still need to do a Deposit to be able to trade. So after you make a deposit, the funds are REMOVED from your Metamask and appear in the Defi exchange account balance. It doesn't stay in your Metamask account so you no longer have control of those funds.

So if the Defi exchange goes bankrupt like FTX, your assets are also going to be lost. So it still seems centralized. Only difference is instead of using a username/password/2fa to login to the website all you do is use your Metamask to login.

Can someone explain what the hype is about these Defi exchanges ? Because to me it still seems centralized.

[1714907950]

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[1714907950]

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[mk4]

Your funds are deposited to a smart contract that will manage your funds, not necessarily a centralized custodian that would hold your funds. Think of it as a wallet that's controlled by code. These "DEXs" can't necessarily go bankrupt, but the risks are with concerning exploits and stuff.

^Also, not all DEXs have this model. Some DEXs need to get a hold of your funds because it needs to if you're trading futures/etc. On the other hand, with spot market trading like Uniswap, you don't necessarily need to deposit.

But yea, the "decentralized" definition in contrast to DEXs is a slippery slope — it's going to depend on how you look at it. A far more better description is "non-custodial".

[noorman0]

-snip-
So if the Defi exchange goes bankrupt like FTX, your assets are also going to be lost.

FTX is not defi (afaik). But if they also offer a defi product (truly a provable defi), then it's too complicated to analyze. I don't even think that funds were lost in the first place as I have never heard of any claims from customers regarding defi FTX products. But that doesn't mean defi can't go bankrupt, it can be caused by liquidity matters , smart contract vulnerabilities, or other factors.

[Tytanowy Janusz]

you still need to do a Deposit to be able to trade.

I've seen only 1 dex that was forcing me to deposit funds and it was DYDX (decentralized futures trading). Spot trading (or rather swaping coins) doesn't need that. All dexes that I was using (pancakeswap, uniswap and few others) needed you to connect wallet and approve usage of token only.

FTX is not defi (afaik).

Of man where were you last 4 months?

[Husires]

Centralization means that there is one central authority or a group of authorities that control your funds and thus freeze or delete them.
Decentralization means that there is no single authority that can do this, and to achieve this, it requires many parties to meet on something that may not happen, for example, in Bitcoin, the longest chain (more than 51%) can make changes in many things, but it is difficult for one central party or several central parties to do so.

In DeFi, if they are based on the same blockchain, they are managed by a smart contract, and if the currency is decentralized, the platform can be decentralized.

As for the exchanges between several blockchains, they are centralized at some point.

[adaseb]

Yes I am referring to those futures/derivative/perpetual Defi's like DYDX. I know that with Pancakeswap you basically buy it and get the tokens transfered right away. You can pretty much do this with a CEX where you deposit funds, buy the token you want, and then withdraw into your cold storage.

But I am talking about how exactly do the ones where you are actively trading, paying funding rates every 8 hours or so. How exactly are those decentralized since you send the funds to them. If you are in an active trade with leverage how can they work since prices are changing constantely?

[libert19]

Your funds after being removed from your account remain in smart contract of dapp. Smart contracts can be interacted with even if the front-end has disappeared. These smart contracts exist as long as ethereum will exist, and ethereum is governed by nodes around the world, hence word decentralization.

Unless the smart contracts has flaw and someone hacks it, you can always interact with smart contract and recover your funds.

This is why audit firms exists. Your funds security depends on security of smart contract.

I remember withdrawing my funds a couple times through interacting with contract, even when platform itself had disappeared.

There was this recent dictum exchange lp rug where people were able to salvage their liquidity from recoverable pools through interaction with smart contracts. You can read about it here.

[adaseb]

Your funds after being removed from your account remain in smart contract of dapp. Smart contracts can be interacted with even if the front-end has disappeared. These smart contracts exist as long as ethereum will exist, and ethereum is governed by nodes around the world, hence word decentralization.

Unless the smart contracts has flaw and someone hacks it, you can always interact with smart contract and recover your funds.

This is why audit firms exists. Your funds security depends on security of smart contract.

I remember withdrawing my funds a couple times through interacting with contract, even when platform itself had disappeared.

There was this recent dictum exchange lp rug where people were able to salvage their liquidity from recoverable pools through interaction with smart contracts. You can read about it here.

How does it work when you are in an active trade however? Because it seems people might exploit the contract if they are in a losing trade.

Lets say someone enters a trade and they are -99% loss on the trade. Before they close the trade, can't they do some withdraw function from the contract and get their original deposit back? This is what I don't understand. How does it work when you are in an active trade.

[GreatArkansas]

Just take an example of using a centralized exchange when you need a lot of inputs about your personal information during signing up, and when a centralized exchange asks you to undergo to Know-Your-Customer (KYC) process, it's really a hassle.
But on Decentralized Finance (DeFi), you just need your cryptocurrency wallet then no more signups, KYC, etc. And in just few clicks you can open trade position with leverage or you can exchange your cryptocurrencies to other cryptocurrencies.

[libert19]

Your funds after being removed from your account remain in smart contract of dapp. Smart contracts can be interacted with even if the front-end has disappeared. These smart contracts exist as long as ethereum will exist, and ethereum is governed by nodes around the world, hence word decentralization.

Unless the smart contracts has flaw and someone hacks it, you can always interact with smart contract and recover your funds.

This is why audit firms exists. Your funds security depends on security of smart contract.

I remember withdrawing my funds a couple times through interacting with contract, even when platform itself had disappeared.

There was this recent dictum exchange lp rug where people were able to salvage their liquidity from recoverable pools through interaction with smart contracts. You can read about it here.

How does it work when you are in an active trade however? Because it seems people might exploit the contract if they are in a losing trade.

Lets say someone enters a trade and they are -99% loss on the trade. Before they close the trade, can't they do some withdraw function from the contract and get their original deposit back? This is what I don't understand. How does it work when you are in an active trade.

No, because contracts have logic written that keeps track of that 99% loss on that particular account/address.

[cryptoaddictchie]

Lets say someone enters a trade and they are -99% loss on the trade. Before they close the trade, can't they do some withdraw function from the contract and get their original deposit back? This is what I don't understand. How does it work when you are in an active trade.

Are you referring on the spot live trade or leverage trading? Most dex/defi doesnt have feature of centralIed exchange but some improve a lot in the future. Its working based on your active trade engaged in the dapp. Most defi dex cant have a set order sell but mostly automatic swap trade when in used. Its real time so if you loss when you are trying to swap tokens vice versa to some tokens it would only execute based on your activity deed. But some leverage trading can even set now stop loss or any feature on a dex platform to avoid much bigger loss.

[Fivestar4everMVP]

Can someone explain what the hype is about these Defi exchanges ? Because to me it still seems centralized.

You are absolutely correct, but I believe scenario you shared in your post is peculiar to the decentralized exchange you are referring to, there are several exchanges that Claim to be decentralized but in actual sense, they are not, any decentralized exchange that would still require you to deposit your fund to their platform before you can trade is not a decentralized exchange, but a centralized exchange that uses a decentralized login system.
Example is
Etherdelta - when they were still around
Forkdelta - when they were still around
Some other ones which are still around but I can't remember their names right now..

When we talk about decentralized exchanges that are truly decentralized, then we should be talking about
Uniswap
PancakeSwap
Dodo
Apeswap
Chainge Finance
And a whole lots of others, the mentioned are the ones I've personally used.

[libert19]

You are absolutely correct, but I believe scenario you shared in your post is peculiar to the decentralized exchange you are referring to, there are several exchanges that Claim to be decentralized but in actual sense, they are not, any decentralized exchange that would still require you to deposit your fund to their platform before you can trade is not a decentralized exchange, but a centralized exchange that uses a decentralized login system.
Example is
Etherdelta - when they were still around
Forkdelta - when they were still around
Some other ones which are still around but I can't remember their names right now..

When we talk about decentralized exchanges that are truly decentralized, then we should be talking about
Uniswap
PancakeSwap
Dodo
Apeswap
Chainge Finance
And a whole lots of others, the mentioned are the ones I've personally used.

Incorrect. Etherdelta and uniswap are both decentralized exchanges. Difference is that they use different matching engine, etherdelta used traditional matchmaking engine between users while uniswap uses amm based.

[joniboini]

there are several exchanges that Claim to be decentralized but in actual sense, they are not, any decentralized exchange that would still require you to deposit your fund to their platform before you can trade is not a decentralized exchange, but a centralized exchange that uses a decentralized login system.

I'm pretty sure Forkdelta and most delta-related exchanges use smart contracts to hold the funds, so not actually similar to a centralized exchange at all. I'm not sure what constitutes decentralized and centralized login either, but almost all "DeFi" platforms use more or less similar login models. CMIIW.

It was mentioned above, so I suggest you read it more. I also agree that using the term "non-custodial" is better since most of the time we're just talking about whether we still have control over our funds or not. Many exchanges use the term "decentralized" loosely and it is unclear what line they are referring to. At one point I've seen an exchange use it to describe the nature of their servers being hosted in multiple countries, but their cold wallets are controlled just by four people.

[asriloni]

FYI, FTX was centralized exchange site. Defi is not even decentralized and it's actually BS. The smartcontract being used to locked your funds may be decentralized but since you will be only able to interact with the smartcontract when its function has been synched with the front end.

In so many case when defi goes bankrupt due to the liquid or something else and then they(defi developers) were starting to lock user's funds by disabling its front end to make sure unable to access the smartcontract. It's all still centralized.

I see nothing decentralized since smartcontract is also relying with its programmer that was making back and front end connected to the smartcontract that will give you the ability to access it.

Celcius's case is the best example about how developer of defi can lock your money by disabling the front end.

[vv181]

It is safe to assume that anything that has a word about decentralized applications or decentralized finance, wasn't actually the correct way to convey what the "decentralized" terminology meant. The word might simply convey that it runs on not mere centralized-like manners, the company/platform has complete control. libert19 explain nicely the word "decentralised" within the context.

So after you make a deposit, the funds are REMOVED from your Metamask and appear in the Defi exchange account balance. It doesn't stay in your Metamask account so you no longer have control of those funds.

The funds are still in the wallet, but it is just in another form (token). Say, you deposit USDC, USDC tokens are governed by their own smart contract, so the Defi platform couldn't do much, thus they make a smart contract to hold and bookeping the USDC by giving out another token to indicate users' funds, say dUSDC(https://docs.aave.com/developers/tokens/debttoken). If you add the dUSDC contract address to the wallet, the token will show up.

Celcius's case is the best example about how developer of defi can lock your money by disabling the front end.

Celcius is not a decentralized finance.

[libert19]

FYI, FTX was centralized exchange site. Defi is not even decentralized and it's actually BS. The smartcontract being used to locked your funds may be decentralized but since you will be only able to interact with the smartcontract when its function has been synched with the front end.

Use etherscan's write contract feature. You can use this even when platform's official front-end is down/inaccesible.

In so many case when defi goes bankrupt due to the liquid or something else and then they(defi developers) were starting to lock user's funds by disabling its front end to make sure unable to access the smartcontract. It's all still centralized.

Read my comment above, even when front-end is gone you can interact with these contracts using etherscan.

I see nothing decentralized since smartcontract is also relying with its programmer that was making back and front end connected to the smartcontract that will give you the ability to access it.

Smart contracts are public, scrutable by anyone, interactable by anyone. If you don't trust it, don't bother with it.

Celcius's case is the best example about how developer of defi can lock your money by disabling the front end.

Celsius was centralized.

The funds are still in the wallet, but it is just in another form (token). Say, you deposit USDC, USDC tokens are governed by their own smart contract, so the Defi platform couldn't do much, thus they make a smart contract to hold and bookeping the USDC by giving out another token to indicate users' funds, say dUSDC(https://docs.aave.com/developers/tokens/debttoken). If you add the dUSDC contract address to the wallet, the token will show up.

Whether you get another form of token or not, it depends on platform but once funds deposited into platform they aren't in your wallet but in smart contract. This other form called dUSDC is only viable within aave ecosystem, it's not what you deposited.

[vv181]

~but once funds deposited into platform they aren't in your wallet but in smart contract. This other form called dUSDC is only viable within aave ecosystem, it's not what you deposited.

I did not say the token that is being deposited stays within the wallet, the wrapped token is what stays in the wallet. The wrapped token of aave is just an example.

[darewaller]

Ok so I am learning lots about DeFI and NFTs. I am watching videos on how these Defi exchanges work, also reading the user guides and trying to follow the money by looking at the blockchain.

From what I understand. You generally use Metamask and this is used to Connect your Metamask to some Defi exchange you want to use. However this is where I am confused.

In these videos AND from the "getting started" guide, after you connect your Metamask, you still need to do a Deposit to be able to trade. So after you make a deposit, the funds are REMOVED from your Metamask and appear in the Defi exchange account balance. It doesn't stay in your Metamask account so you no longer have control of those funds.

So if the Defi exchange goes bankrupt like FTX, your assets are also going to be lost. So it still seems centralized. Only difference is instead of using a username/password/2fa to login to the website all you do is use your Metamask to login.

Last time I tried a web3/decentralized crypto casino and my experience is exactly the same as you. I did wonder on why depositing is still needed but what I thought is my funds will immediately appear in my gambling account right after I connect my wallet on the site. I then say that this thing seems doesn't make any sense. Was it only like a gimmick or what? They are also risky than their centralized competitor because we are risking our whole wallet by the time we connect them in the website.

I already saw cases like this where users wallets got emptied because they connect in a scam site. What is worse is that scammers can get away easily because it was decentralized anyway.

[dansus021]

What platform are you using because there are two types of Decentralized Exchange that I know

One is like Uniswap and Pancakeswap basically the transaction is like a P2P market. Its like market taker on Centralized Exchange and there is no Order Book.

and the second was a platform Like Idex and maybe this happens to you. You deposit money into the smart contract is basically like the hot wallet on Cex that gather a bunch of user fund and you can actually trade like on traditional CeX the difference is the owner can take your money from the smart contract unless they edited the smart contract to withdraw the money.

and Big Dex usually show all the code and does not make them private so everyone can see the code and how the exchange work.