If it's not on 'multisig', it's not secure
Why multisig protocol offers the world's most secure crypto-backed lending compared to 'Defi' or 'CeFI'
while Crypto backed lending offers incredible benefits for society at large, there are many models that popped up that offer crypto-backed lending with various security models. Right now CeFI and DeFI are the most popular options for crypto-backed lending.
In CeFi ( Centralized finance ), a central party acts as a custodian and middleman for both borrower and lender and holds collateral and grants a loan to the borrower ( crypto holder ). Celsius, Voyager, Nexo, and Vauld fall in this model.
In DeFI ( decentralized finance), borrowers and lenders interact with a lending smart contract on the blockchain. the smart contract is usually handled by a team of developers / DAO. Aave, Maker Dao falls into this model.
The Big Problem
Celsius , Voyager, Vauld have all frozen withdrawals owing to some extremely risky bets waged by these companies
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The DeFi protocols are not doing that great either, with various hacks, and breaches taking place in daylight by hackers across the globe with no legal recourse whatsoever.
The problem with both CeFI and DeFI is that they both suffer from a single point of failure
Security and Decentralization
Even though avoiding KYC/AML through DeFi protocols sounds cool, the 'Single Point of Failure' risks like 'Collusion of Oracle Price feeds' or 'Custodial risks of wrapped assets' etc are not eliminated and thus result in disastrous losses for holders
Ekin Genç, Stephen Graves
Multisig-backed lending offers a truly trustless setup
A Multi-Signature or Multisig for short bitcoin wallet typically has 2 or more joint account owners, Now, Out of these say 3 co-owners one can set a threshold of say 2 co-owners as the requirement to process any transactions.
This incredible innovation improves security by orders of magnitude if designed properly with hard wallets.
With a 2/3 multisig wallet, 3 users or keys are used to create an address which however needs atleast 2 users to sign to move the funds out of the 3 users, this means no single party can unilaterally move the funds, and as a result, this set up offers incredible security benefits that can never be possible with centralised custodians.
How are Multi-Sig wallets better than the centralized wallets used by other platforms?
Using a Multi-Sig wallet provides a level of security and legal clarity currently not offered by any other bitcoin lending platform. Our multisig model offers not only incredible security but also offers legal clarity which is currently not available in most crypto lending platforms. The lack of legal clarity restricts most of the money available in the US banks from entering crypto-backed lending.
There are many incredible benefits to utilizing the multisig model for a crypto-backed lending model which are simply impossible in other models.
Valuete
Here are various risks of CeFi and DeFi platforms
The Hidden Dangers of CeFI ( Centralized Finance ) in crypto lending
Security risk
In Centralized custodian lending, as the amount of securitized funds increases, so does the hacking risk from both external and internal entities. Unfortunately, this phenomenon has no simple resolution, especially for centralized, crypto-backed lending. In the case of simple crypto custody, the industry has slowly evolved to deploy 2-of-2 multi-sig, where the platform and user each hold a key which is jointly required to unlock access to the securities which mitigates any single bad actor risk. Unfortunately for crypto-backed lending, full custody is the only mode that is deployed today, creating ever larger 'honey pots' to crypto assets—-an asset class with the highest flight risk in human history.
Counterparty risk
The risk of a counterparty going bankrupt or freezing withdrawals is all too common in the world of crypto. Centralized lenders, such as Celsius, have full custody of customer funds and assume many associated risks like hacking, seizure, and re-hypothecation where the customer is forced to take up all hidden risks and real loss.
Rehypothecation risk
Rehypothecation involves passing the collateral to a different counterparty which offers ‘yield’ to the centralized lender, like Celsius. When collateral is rehypothecated, the counterparty risk is magnified. Borrowers are not only assuming the risk of the lender defaulting on their collateral, but also the default of the lender’s counterparty.
Short selling - Price suppression risk
When centralized crypto lenders offer yield for storing ‘collateralized’ Bitcoin, they usually earn this additional yield by offering their customer’s Bitcoin to short sellers, who pay interest for this privilege. What’s even worse is that short selling suppresses price and increases volatility which acts as a de-accelerant to the long-term adoption of Bitcoin.
Legal risks
Owing to the incredible losses faced by investors in crypto lending platforms, regulators are focused on rolling out some of the most onerous regulations on the lending industry. Insiders predict these upcoming regulations will disrupt the current business models of crypto-backed lenders by increasing the cost of operations and regulatory compliance significantly.
Inadequate insurance coverage
Even though many centralized lending marketplaces claim to have insurance, coverage limits are wholly inadequate. Even the most trusted centralized crypto service providers such as Bitgo and Coinbase lack complete insurance coverage for their customer funds. Their insurance only covers the first $100 -200M of hacked funds, while these businesses have assets worth more than $10 Billion. In the case of a significant hack, most depositors will receive a large haircut on their assets, potentially eliminating a significant amount of their funds.
The Hidden Dangers of DeFi ( Decentralized Finance ) in crypto lending
Collateral risks
DeFi platforms are not without their issues though, most Defi platforms use WBTC ( or renBTC ) which is a wrapped Bitcoin issued by centralized custodians like Bitgo which has its own set of problems as it's again 'trusting' the institution to keep the funds safe. The worst part is if the bitcoin at Bitgo gets hacked there is no fallback at all.
For WBTC, the risk is not a collapse in Bitcoin; but rather the "basis" between $BTC and $WBTC.
— 🤖 Leshner (@rleshner) July 7, 2020
There are two risks: a total collapse of WBTC, and a market disruption in WBTC.
Oracle attacks
Oracles feed prices into the smart contact that run the DeFI protocols
There are many other risks in Defi like Smart contract risks, Cross Chain Bridge attacks, Hacking risks and many more.
Cross Bridge hacks
Stephan Roth
Smart contract Hacks
Vladislav Malynovskyi
Regulators are fed up with DeFI and are launching their whips now
Disclaimer: This is not financial advice, I am not a financial advisor this information is purely educational, All Investments carry risk. Always do your own research.
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