Bankless: The last piece of the DeFi puzzle

Author: Arnav Pagidyala Source: Bankless Translation: Shan Ouba, Golden Finance

Despite the billions of dollars in total value locked on the chain and significant progress in wallets, interoperability, and blockchain performance, DeFi is still far from reaching its potential broad user base. In contrast, centralized exchanges (CEX) are rapidly growing users and assets - not because they are better, but because they are more convenient.

Applications such as Infinex, Defi App and Definitive have already demonstrated what a smoother on-chain experience might look like: lower fees, smaller spreads, access to more assets and returns, etc.

But as long as fiat onboarding remains slow, expensive, and error-prone, DeFi will remain a niche tool for crypto-native users.

Ordinary users can buy meme stocks on Robinhood or trade tokens on Coinbase with funds available instantly and with few barriers. If you try to do the same on-chain through MoonPay or Transak, you will face 3-6% fees, over 50% failure rates, and even have to wait days for completion.

What's worse is that if you pay with a credit card, the failure rate is as high as 80%.

But we have also seen the huge potential when the onboarding friction disappears:

• Moonshot has successfully onboarded more than 1.5 million users through Apple Pay onboarding without KYC

• Opera Minipay has successfully onboarded 8 million users through a KYC-free onboarding system integrated with local payment methods

• In short, onboarding is the biggest bottleneck in DeFi today.

  This post will explore: why Web2 onboarding works, why onboarding in the crypto world is still in its infancy, and how a new generation of integrated DeFi applications can close this final loop.

  Web2 Fiat Onboarding

  If you’ve ever tried to open an account and deposit money on Robinhood, Coinbase, or any of the new online banks, you’ve almost certainly experienced the smooth and seamless ACH (Automated Clearing House Transfer) or debit card onboarding process.

  The deposit user experience (UX) can be broken down into three core elements: handling fees, deposit failure rate, and speed. Most CEXs offer almost free deposits, with extremely low failure rates, and funds can be instantly credited and traded, providing an almost perfect user experience overall. In addition, fintech companies and CEXs are actively carrying out deposit incentive activities to encourage users to top up as much as possible. CEXs have actually occupied a monopoly position at the deposit entrance, "pricing" out other competitors.

  

  

  

  

  Why can traditional deposit channels do so well?

  In short, CEX is willing to use fiat currency deposits as a loss-making drainage tool to optimize user conversion.

  CEX actively subsidizes all related costs such as credit card fees, risk costs, compliance review (KYC), liquidity reserves, exchange rate conversion, etc., so when a user tops up $100, the platform will still show $100 in your account. At the same time, CEX reduces the failure rate and makes funds available for trading immediately by taking higher risks and actively subsidizing the deposit process.

  Look deeper:

  When users deposit funds using mainstream payment methods, funds actually have a "revocable" time window. For example, deposits made through ACH transfers can be revoked within 60 days. But after you transfer money using ACH on Coinbase, the platform immediately allows you to buy BONK, right?

  This is the "magic" behind CEX. CEX does not allow you to transfer funds out of the platform before ACH clears. For example, what if you bought BONK and the price plummeted 50%, and then you initiated a debit card chargeback?

  In order to let you trade in advance, CEX will use a series of risk hedging strategies to control exposure, such as:

  • Use internal risk control pool to hedge user positions

  • User positions match each other

  • Use statistical models to predict ACH failure rates and dynamically hedge

  Through these means, the exchange can let you trade even if the funds have not yet been cleared, while ensuring that assets can be frozen or recovered in the event of fraud.

  Of course, this strategy is not foolproof. Hedging and risk management are more difficult for unpopular trading pairs or high-risk options (such as 0DTE options). But for CEX, it is worth it - because they can make several times more profit than losses in the future by cross-selling high-profit products (such as perpetual contracts, options, leverage, etc.).

  

  When the deposit occurs on the chain, the situation is completely different.

  The nature of non-custodial wallets means that users can transfer funds immediately, and once funds are withdrawn (such as ACH chargebacks or credit card rejections), the platform has no means to recover them.

  This is the fundamental reason why service providers like Transak and MoonPay charge high fees, slow payment, and high failure rates. They must control risks extremely conservatively - with loss prevention as the priority, because they cannot freeze assets, hedge risks, or implement loss-making strategies through other products like CEX.

  Understanding the Economic Model of Centralized Exchanges (CEXs)

  A centralized exchange will introduce a new batch of users through multiple user acquisition channels. Most of these users are "high-quality users" who will continue to use the platform's various products and bring profits to the CEX. However, there will also be some "bad users" who may initiate a rejection of fiat currency deposits through fraudulent means, or register just to receive deposit incentives, and then stop being active after completing the first operation, causing the platform to lose money.

  

  Each batch of new users is composed of the above types of users. The task of CEX is to maximize the activation and service of those valuable users, while control the risks and losses brought by invalid or malicious users.

  With the addition of each batch of new users, CEX's data advantages continue to accumulate. They continue to optimize the model to minimize risks and maximize returns. Consider the amount of data Coinbase has accumulated since 2013, from anti-money laundering (AML) to fraud detection to deep insights into user behavior, which gives them a significant head start.

  In summary, the operating strategy of CEX is to find a balance between "relaxing risk parameters to drive revenue growth" and "tightening risk control to avoid negative expected value user groups". The profitability of the top CEXs is extremely strong, making them more willing to take risks and tend to aggressively pursue revenue growth.

  Endgame concept

  DeFi's competitive advantage lies in its structural low cost, which makes it potentially catching up with centralized exchanges in some aspects. You know, CEXs spend tens of millions or even hundreds of millions of dollars on employees, compliance, and legal affairs every year; while small team DeFi protocols like Hyperliquid, Pump, and Axiom can achieve hundreds of millions of dollars in profits with a team of less than 20 people.

  The key breakthrough point in the next stage will be that these profitable DeFi protocols will invest part of their revenue into **user acquisition (top-of-funnel)**, so as to achieve parity with CEX in terms of marketing, brand credibility, etc. The core behind this is still the ease of use of the product.

  Let's take a simple example: a Brazilian user wants to deposit on xDEX via a debit card:

  The user initiates a deposit using a debit card → the onramp service provider sends USDC to the user's DEX wallet → the smart contract verifies the deposit → the smart contract rewards the service provider with a certain percentage of the deposited TVL (for example, $5 for every $100 deposited)

  For users, this greatly reduces the deposit failure rate, makes funds instantly tradable, and reduces fees to zero. Essentially, this is about getting to the same level of CEX on-ramps.

  

  If a protocol pays a 5% subsidy for every $100 of TVL deposited, and it can earn more than 5% annualized on these TVLs, then this subsidy is worth it. Our internal model shows that synthetic asset or perpetual contract DEXs often generate annualized returns of more than 20% on onramp funds.

  Ultimately, onramp subsidies are the key to expanding DeFi beyond crypto-native. And introducing "productive" TVL is far more valuable than a simple token buyback: it brings sustained revenue growth and ultimately drives up the long-term value of tokens. This is the real path to driving on-chain price discovery.