Challenges of DeFi and Centralized institutions in 2021

Challenges of DeFi and Centralized institutions in 2021


At a recent online panel, Huobi Senior Director of Global Business Chern Chung met with Brian Kerr, co-founder and CEO of Kava Labs, to discuss how DeFi and centralized exchanges will interact in 2021 and beyond.

Mutual interest in promoting DeFi

It seems that DeFi and centralized exchanges are at odds with each other in terms of offering people. But just as banking has embraced Bitcoin and helped promote digital currencies, centralized exchanges can play a huge role in spreading DeFi to the masses.

Both centralized exchanges and DeFi projects can see the benefits of collaborative integration, and with the recent launch of Kava on Huobi Global, it’s clear how this can be true.

“Over the past year, DeFi has rapidly evolved into one of the most promising applications of blockchain technology, which has already begun to transform the way both fiat and digital currencies are distributed and managed. As we move towards a truly decentralized economy, DeFi provides the underlying infrastructure for a wide range of important applications and services, such as digital payments, oracle networks, yield aggregators, crypto lending solutions, and more, ” Chang explained of the impact that Kava can have on the Huobi ecosystem and on the broader blockchain and digital asset industries.

He added:

“As one of the world’s leading digital asset organizations, Huobi is constantly striving to strengthen its exchange ecosystem with strong DeFi projects such as Kava, but our DeFi strategy goes far beyond listing exchanges. To promote collaboration and adoption in the industry, we recently opened a dedicated division within the company called Huobi DeFi Labs, creating the global DeFi alliance consisting of an international consortium of centralized and decentralized financial service providers and platforms such as Maker Foundation, Compound, and NEST. We are also investing directly in the technological development of the DeFi space.”

Potentially new audience

Of course, most cryptocurrency users are currently on centralized exchanges, as the user experience and service is far superior to what is available on DeFi, but instead of separation, this is seen as an opportunity for each party to learn from each other.

“Here at Kava, we have data that shows that 93% of cryptocurrency users do not store their own keys and do not participate in DeFi earning opportunities – this is mainly due to technical competence. This tells us that the key to adoption in the future is meeting the 93% of traders who are not currently working in DeFi.

For us, this means working together with exchanges to create direct integration, where the user can participate in DeFi with their assets in just a few simple clicks. This is in many ways superior to today’s DeFi, and for exchanges that will provide this improved experience to their users will see greater adoption and more assets coming to their exchanges.  Kerr said.

With this ongoing integration and the move towards more decentralized finance in general, there is a sense that it would be possible to phase out CeFi, but according to Chern, there will always be a need for some aspects of it.

“A true DeFi must be censorship-resistant, so there is certainly a limit to how much a centralized exchange can integrate without compromising its standing with regulators. Many decentralized exchanges have minimal AML and KYC procedures, but this is an area where centralized exchanges like ours simply cannot compromise.

KYC is a prerequisite for regulatory compliance, but they run counter to DeFi’s promises. KYC protocols are designed to identify the user, potentially breaking down censorship resistance.

Given these limitations, many DeFi protocols actually operate with a high degree of centralization. There is also a growing number of KYC solutions designed specifically for DeFi protocols, but they have not yet been tried and tested in the same way as traditional KYC procedures. For example, our KYC protocols have been developed in collaboration with many different regulatory and financial agencies.

A centralized exchange also means that we can determine which transactions are allowed, depending on the type of transaction, region, and jurisdiction, which provides an additional layer of security to meet AML requirements,” Chern said.