Why DeFi has become Ethereum's moat?
Text | Produced by Zheng Yi | PANews
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2004 V god road show in Hangzhou (picture from the Internet)
This is Ethereum in 2014. In the dream, it stood on the vast starry sky early, but in reality, it faced the cruel fact that it was still struggling in the cracks of the rocks. At that time, in order to raise funds, Vitalik knocked on the door of one investor after another, and experienced numerous rejections and ridicules. But it was his hard work that made the world computer finally "start" two months later.
Although the dream is to become a "world computer", Ethereum has been in a state of "sleepwalking" for a long time since its birth. From the hard fork of THE DAO event, to the "crazy coin issuance" of the national ICO, to the current ETH2. Applications can cause the entire network of Ethereum to be blocked.
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Why are DeFi and Ethereum a "natural pair"?
In a broad sense, decentralized financial DeFi is highly compatible, whether it is decentralized exchanges, decentralized lending, payment platforms, derivatives, etc., can all be included in the category of DeFi.
It is no accident that Ethereum embarked on the path of DeFi. From the perspective of the historical development of Ethereum, in 2017, the craziest stage of ICO, most of the fundraising tokens were generated using the ERC-20 protocol. These massive assets were deposited on the Ethereum network, and the exchange between tokens You only need to pay ETH as the gas fee.
As of June 11, Ethereum’s ERC-20 standard has issued 268,091 types of tokens, and ERC-721 standard has issued 5,822 types of tokens. According to TRON and EOS browsers, TRON’s mainnet has issued a total of 6,269 types Tokens, the EOS main network issued a total of 5129 kinds of tokens.
Diversified tokens are precipitated on the Ethereum single chain, resulting in strong interoperability without the need for cumbersome operations such as cross-chain. The safety and convenience of asset swaps in a single chain also offset the shortcomings of insufficient transaction speed. At that time, some decentralized exchanges emerged as the times require, becoming an important infrastructure for the future development of DeFi.
Meanwhile, ethereum-based stablecoins have also captured a majority of the market share. Stablecoins including USDT, USDC, PAX, BUSD, TUSD, HUSD, and DAI are all generated based on the ERC-20 protocol. According to etherscan Ethereum browser data, the total market value of these stablecoins in circulation exceeds 10 billion US dollars. The rich stablecoin system meets the basic financial needs of users such as asset mortgages and peer-to-peer lending, and enables the initial formation of open finance without access restrictions.
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The market value of XAUT continues to rise
In addition to "digital gold", NFTs based on Ethereum ERC-721, ERC-1155 and other protocols provide on-chain value anchor objects for artworks, game assets, financial documents, etc. These value assets that originally existed in the real world, in the process of being transferred to the chain, strengthened the financial attributes of Ethereum and enriched the types of assets on the chain.
Recently, MakerDAO, the largest DeFi application on the Ethereum network, is trying to break through the boundaries of the on-chain world, allowing users to convert real-world assets into encrypted assets that can be used in DeFi applications through the operating system of Centrifuge.
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The Dilemma of DeFi in the Ethereum Network
Although Ethereum dominates the DeFi track and develops rapidly, it is constrained by many difficulties, such as walking in a quagmire. Among these difficulties, the security dilemma bears the brunt.
On April 18, the imBTC pool in Uniswap was hacked, and 1,278 ETH was stolen, worth about 220,000 US dollars. At the same time, about 18.37 imBTC were acquired by two arbitrageurs starting with 0x3195c3 and 0x17559a at the transfer price . Hackers took advantage of the compatibility issues between Uniswap and Ethereum's ERC-777 standard, and used multiple iterations of the ERC-777 standard to call tokensToSend to implement reentrancy attacks when conducting ETH-imBTC transactions.
Coincidentally, just one day later, lendf.me, a lending protocol under the DeFi platform dForce, was attacked. Its attack pattern is exactly the same as that of Uniswap. As a large number of tokens were transferred by hackers, the credibility of the platform disappeared.
Prior to this, on March 26, a loophole was found in Synthetix’s mortgage liquidation function, which allowed users to destroy the borrower’s sETH assets arbitrarily through the liquidation interface after the 3-month mortgage trial period ended And earn ETH.
In addition to code loopholes, the network throughput problem of the Ethereum platform itself will also expose the DeFi platform to certain systemic risks.
On March 12 this year, the cryptocurrency market plummeted, and the price of Ethereum ETH was not spared. At that time, a large number of collateralized debt positions of Ethereum-based DeFi application MakerDAO fell below the liquidation threshold, which triggered the execution of liquidation procedures. Due to the sharp increase in the gas fee of the Ethereum network, MakerDAO's liquidation process lacked competition completely. The liquidation robot (Keeperbot) that was supposed to participate in the liquidation process was blocked because of the low gas value set. A liquidator (Keeper) won the auction with a bid of 0 DAI with no competitors.
For example, in the previous FOMO3D game, the hacker sent a large number of transactions to block the network and thus won the final prize. It also warned developers and users that the DeFi platform based on Ethereum still "looks beautiful" and has low throughput. It has been unable to meet the increasing transfer demand.
On another level, the oracle system that provides global variables is also the safety gate of DeFi. If the oracle machine is attacked or a vulnerability is discovered, the entire DeFi system may be paralyzed. For example, the dZx platform, an open financial agreement, uses the Uniswap oracle machine, and uses WETH/WBTC prices as price feeds. After a user manipulates the Uniswap price, it directly affects the price of the dZx platform, and is subsequently arbitraged by the user for 360,000 US dollars.
In addition to the security dilemma, the high threshold required to participate in DeFi has also "dissuaded" many users. Different from simple currency transactions on exchanges, participating in DeFi is actually entering the world of cryptocurrency with two feet. In this system, each user needs to complete the creation of wallets on the chain, management of private keys, transfer transactions, private key signatures and other operations, but also fully understand smart contracts, pledge redemption and other related knowledge, and respond to potential risks that may arise in a timely manner. If DeFi really wants to "fly into the homes of ordinary people", then lowering the product entry threshold and optimizing user experience will be a threshold that must be passed.
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The Future of Ethereum and DeFi
Taking the world computer as an ideal starting point, financing tools as the pinnacle of development, and the deposited asset pool and rich application ecology as the moat, seize the DeFi track and realize value return. Ethereum's goal of becoming a global "financial settlement layer" is becoming clearer.
The change of Ethereum's vision also represents its value transfer from idealism to realism. The reason behind it, whether it is the helpless move in the face of many Ethereum killers, or the combination of cryptocurrency and financial attributes, is an important process in the development of the second largest network in the encrypted world.
What should the blueprint for the future of DeFi be? No one knows. But it is foreseeable that DeFi will form an important supplement to traditional finance because of its characteristics that do not require admission. If the emergence of Bitcoin has made low-cost cross-border payments possible, then the development of the DeFi system is the second breakthrough of the blockchain system, which is fundamentally changing the settlement structure of the global financial system.
But we also need to understand that the operation of the entire society is always dominated by humans, and it is difficult for the financial system, as a part of social functional institutions, to operate independently without human intervention. Especially when it is compatible with the regulatory layer, complete decentralization may not be able to achieve better utility. By combining with CeFi (centralized finance), it becomes a weakly centralized system, which may be more adaptable to the existing society.
And Ethereum, because of its huge first-mover advantage and rich and diversified asset accumulation, will become an important part of the entire DeFi field.
This article is the sharing and arrangement of PANews Digital Director Zheng Yi on the DeFi power of ZT Global.
