Centralization vs Decentralization

Centralization vs Decentralization

Explain the fully centralized components of the protocol

In the early stages of the protocol, the delta-hedging algorithm and execution model will be internalized and therefore the most centralized piece. Conceptually this is similar to other applications which run an onchain system with offchain matching - for example dYdX and CowSwap.

Over time, there are plans to decentralize this infrastructure as soon as possible and there are no incentives to continue running it internally. CAMP does not skim fees in this process so there is no revenue incentive for the CAMP Labs team. The intent is to eventually move towards an open RFQ model where market makers can step in and compete for execution of the hedge.

Why not have all of the protocol functionality onchain?

Unfortunately, at this moment in time decentralized perpetuals have yet to reach mass adoption, with CeFi open interest 25 times higher than DeFi open interest. In order to scale to the size we believe is needed to serve the masses, CAMP has prioritized accessing centralized exchanges for the far superior liquidity on offer whilst still maintaining DeFi’s core ethos of transparency and censorship resistance.

Specifically what is different vs fully onchain like UXD?

Aside from the internal delta-hedging algorithm mentioned above, the main difference between CAMP and a protocol like UXD is usage of centralized exchanges for greater liquidity.

Fully onchain deployments just use decentralized perpetual futures in maintaining a delta neutral strategy and user assets will be stored in smart contracts. Importantly, CAMP will be using off-exchange solutions (OES) for holding protocol assets, ensuring backing is never stored on centralized exchanges, aiming to minimize counterparty risk to any exchange-specific idiosyncratic events.

While MPC secured custody solutions require a level of trust in the custodian, this appears to be a better compromise than holding any centralized stablecoin with treasury bonds in a US bank account, or even crypto assets on a centralized exchange. Treasury bonds and even stablecoins holding said treasuries are easily censorable, as we saw with Paxos and BUSD in early 2023.

In summary, while the use of custodians may be viewed as more centralized vs. fully onchain solutions, they represent very different censorship risk profiles than onchain stablecoins holding U.S Treasuries in a bank account, or the opaque risk of holding assets on a centralized exchange.

Specifically what does a fully decentralized stablecoin like Liquity offer vs USDca?

Fully trustless decentralization is what Liquity has to offer over USDca. CAMP has made the design decision to initially make some trade offs on full decentralization in order to enable the goal of providing a synthetic dollar that can scale to serve both CeFi and DeFi.

LUSD has made the decision to be as decentralized as possible, however, that decision comes at the price of scalability. As of April 2024, LUSD ranks as the 16th largest stablecoin by market cap at just $112m. Despite advertising a minimum 110% collateral ratio, the average collateral ratio on Liquity is in fact 250%, thanks to incentives to take out a heavily overcollateralized position.

CAMP could have enforced a similar collateral ratio to ensure full decentralization, however a synthetic dollar as capital inefficent as LUSD simply can not scale to rival its more centralized competitors. CAMP ’s 1:1 capital efficiency will make it one of the most scalable synthetic dollar in the industry.

How do you plan to decentralize the stack?

Over time, the hedging infrastructure will be decentralized as soon as possible and there is no incentive to continue running it internally. CAMP does not skim fees from users in the hedging process so there is no revenue incentive. CAMP intends to move towards an open RFQ model for short side hedge liquidity where market makers can step in and compete for execution of the hedge. ****

As onchain DEXes mature it is the hope that USDca can be created using solely use decentralized venues to execute the hedge in order to fully decentralize.

CAMP has already put in place a partnership with Synthetix, in order to use their new v3 platform to hedge on decentralized perpetuals and move towards onchain execution.