Bankless: The Last Piece of the DeFi Puzzle

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

Despite the total value locked on-chain reaching tens of billions of dollars, significant progress has been made in wallets, interoperability, and blockchain performance, DeFi still has a long way to go to reach its potential large user base. In contrast, centralized exchanges (CEX) are rapidly growing in users and assets—not because they are better, but because they are more convenient.

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

However, as long as the fiat currency deposit channels remain slow, expensive, and prone to errors, DeFi will still be a niche tool for crypto-native users.

Regular users can buy meme shares on Robinhood, or trade tokens on Coinbase, and the funds are instantly available with few hurdles. And if you try to do the same on-chain with MoonPay or Transak, you'll face 3-6% fees, a failure rate of over 50%, and even days to complete.

Worse still, if you pay with a credit card, the failure rate is as high as about 80%.

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But we have also seen the huge potential when the resistance to deposits disappears:

• Moonshot has successfully guided over 1.5 million users on-chain through an Apple Pay deposit channel that does not require KYC.
• Opera Minipay has successfully onboarded 8 million users through a KYC-free deposit system integrated with local payment methods.
• Other similar examples exist, but of course, the no KYC mechanism usually only applies to transactions less than $500.

In summary: The deposit channels are currently the biggest bottleneck in DeFi.

This article will explore: why the deposit channels of Web2 are effective, why the deposit in the crypto world is still in its primitive stage, and how the new generation of integrated DeFi applications can bridge this final gap.

Web2 Fiat Deposit Mechanism

If you've ever tried to open an account and deposit funds on Robinhood, Coinbase, or any of the new online banks, you're almost guaranteed to experience a silky smooth ACH (Automated Clearing House Transfer) or debit card deposit process.

The deposit user experience (UX) can be broken down into three core elements: fees, deposit failure rate, and speed. Most CEXs are almost free to deposit, have a very low failure rate, and are instantly credited and tradable, providing a near-perfect experience overall. Coupled with the fact that fintech companies and CEXs are actively pursuing deposit incentives to encourage users to top up as much as possible, CEXs have effectively taken a monopoly on the deposit portal, "expelling" other competitors from the market.

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Why are traditional deposit channels so successful?

In short, CEX is willing to treat fiat currency deposits as a loss-leader tool to optimize user conversion.

CEX actively subsidizes all related costs, including credit card fees, risk costs, compliance review (KYC), liquidity reserves, exchange rate conversions, etc. Therefore, when users deposit $100, the platform will still show $100 in your account. At the same time, CEX reduces the failure rate by taking on higher risks and actively subsidizing the deposit process, allowing funds to be used for trading immediately.

Looking Deeper:

When users deposit using mainstream payment methods, there is actually a "reversible" time window for the funds. For example, deposits made via ACH transfers can be reversed within 60 days. However, after you deposit into Coinbase with ACH, the platform immediately allows you to buy BONK, right?

This is where the "magic" of CEX lies. CEX does not allow you to withdraw funds from the platform before ACH settlement. For example, if you bought BONK and the price plummets by 50%, what happens if you initiate a debit card chargeback?

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

• Use internal risk control pool to hedge user positions
• User positions offset each other through matching.
• Use statistical models to predict ACH failure rates and dynamically hedge

Through these means, the exchange allows you to trade even when 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. For cold trading pairs or high-risk options, such as 0DTE options, hedging and risk management can be more difficult. But for CEXs, it's worth it – because they can make multiple times more of a profit than they lose by cross-selling high-margin products (e.g., perpetual contracts, options, leverage, etc.).

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However, when the deposit occurs on the chain, the situation is completely different.

The nature of non-custodial wallets means that users can immediately transfer their funds. Once a withdrawal occurs (such as an ACH chargeback or credit card dispute), the platform has no means of recovery.

This is the fundamental reason why service providers like Transak and MoonPay charge high fees, have slow transaction times, and experience high failure rates. They must control risks extremely conservatively—prioritizing loss prevention—because they cannot freeze assets, hedge risks, or implement loss-leading strategies through other products like CEX.

Understanding the Economic Model of Centralized Exchanges (CEX)

A centralized exchange will bring in a new batch of users through multiple user acquisition channels. The majority of these users are "premium users" who continue to use the platform's products to monetize the CEX. However, there will also be some "bad users" who may fraudulently chargeback fiat deposits, or simply register to receive deposit incentives, and then cease to be active after completing the first operation, resulting in a loss on the platform.

Each new batch of users is made up of each of the above types of users. CEX's mission is to maximize the activation and service of those valuable users, while at the same time controlling the risks and losses associated with invalid or malicious users.

With each new batch of users joining, the data advantage of CEX continues to accumulate. They constantly optimize their models to minimize risks and maximize returns. Think about the amount of data Coinbase has accumulated since 2013—from anti-money laundering (AML) to fraud detection, to in-depth user behavior insights—this has given them a significant competitive edge.

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

Endgame Concept

The competitive advantage of DeFi lies in its structurally low costs, giving it the potential to surpass centralized exchanges in certain aspects. It is important to note that CEX incurs annual expenses in the tens of millions to even hundreds of millions of dollars in areas such as staff, compliance, and legal matters; whereas small team DeFi protocols like Hyperliquid, Pump, and Axiom can achieve hundreds of millions in profits with teams of less than 20 people.

The key breakthrough point in the next phase will be that these already profitable DeFi protocols invest a portion of their income into user acquisition (top-of-funnel), thereby achieving parity with CEX in terms of marketing, brand credibility, and other aspects. The core of this, however, remains the ease of use of the product.

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

Users initiate deposits using debit cards → onramp service providers send USDC to the user's DEX wallet → smart contracts verify the deposit → smart contracts reward the service provider with a certain percentage of the deposit's TVL (for example, for every $100 deposited, a reward of $5) This greatly reduces the deposit failure rate for users, makes funds instantly tradable, and brings transaction fees down to zero. Essentially, this achieves a deposit experience on par with CEX.

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

Ultimately, onramp subsidies are key to extending DeFi beyond crypto-native. Introducing "productive" TVL is far more valuable than simple token buybacks: it brings continuous revenue growth, which ultimately drives the long-term value of the token. This is the true path to driving on-chain price discovery.