Decentralized Broker or Protocol? Analyzing the Two Paths to Build the Foundation of DeFi

Decentralized finance (DeFi) has two primary approaches for building its foundation: decentralized brokers and protocols. Decentralized brokers act as a middleman between buyers and sellers in a trustless manner and offer benefits such as liquidity, security, and accessibility. However, they also have drawbacks such as high fees and centralization. Protocols, on the other hand, create automated, trustless systems for exchanging assets and offer benefits such as low fees, decentralization, and flexibility. However, they can be complex to build and maintain and can be vulnerable to hacks and exploits. Ultimately, the choice between decentralized brokers and protocols will depend on the specific use case and the needs of users.

DeFi is still in its early stages, and builders are facing a major crossroads: choosing to build on a “decentralized broker” or a “protocol” as the foundation? Morpho Labs CEO Blockingul Frambot analyzes the characteristics of the two approaches and their current adoption status.

Decentralized Brokers are platforms similar to TradFi funds or brokers, but with on-chain infrastructure and decentralized governance. In short, they are custodial DeFi platforms. Typically, on-chain brokers follow two patterns: flexible, custodial, and product-oriented codebases, and reliance on economic and statistical models.

Protocols are trustless general financial primitives that lay the foundation for more layers to be built upon them. These protocols are mostly complete, as they can run correctly without external interaction. Typically, there are two main patterns to identify whether a DeFi platform is an actual protocol: trustless and general.

While most stablecoins, perpetual exchanges, or over-collateralized loan pools often adopt the decentralized broker model, the trend seems to lean towards the protocol approach. For stablecoins, Maker DAO’s ultimate goal is to externalize complexity outside of the core contract and emphasize the fairness of the currency it creates. For DEXs, fee tiers, price changes, and oracle functions are the only quantifiable parts retained in Uniswap V3, which are removed in V4. Throughout the DeFi landscape, it is evident that lending has always favored decentralized brokers, with no complete protocol dominating the scene.


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