The spring of DeFi has arrived, but it's still far from the highlight
Guru said that using “robots” with transparent rules to provide financial services is a new paradigm shift. DeFi is developing rapidly and is a very important trend in the future. Platform users need to pay attention to the risks that may be caused by smart contracts setting up an Admin Key, and assess whether the platform administrator will easily transfer the user's money. Long-running platforms are relatively better in terms of security. In the process of DeFi development, some rating agencies will appear to conduct risk assessments of these projects for the reference of platform users.
DeFi (Decentralized Finance) is an extension of stablecoins. At the beginning of 2020, the DeFi sector grew rapidly. Its overall market value exceeded 1 billion US dollars in March. After the 3.12 Black Swan incident, the DeFi market value soon reached a new high of 2 billion US dollars. We fully feel that the spring of DeFi has arrived. The Ethereum community is making every effort to pave the way for DeFi. Various types of decentralized financial management and mortgages have sprung up, and even innovative products such as zero-interest loans and flash loans have appeared.
Among them, Compound is undoubtedly a star in the DeFi field. The launch of the COMP governance token is known as opening DeFi's Pandora's box. Due to Compound's newly announced incentive mechanism, not only can borrowers be rewarded with COMP tokens, but lenders can also be rewarded with COMP tokens. Since its introduction, this “financial management is mining” incentive mechanism has instantly set off a wave of wool rolling in the market. However, there are concerns that Compound will eventually repeat Fcoin's mistakes due to unreal crazy growth.
Recently, the sales market for Ethereum wealth management products on the MYKEY platform has been very popular. The reason is that users have compounded expectations that the price of ETH will increase and are willing to hold ETH for a longer period of time. Therefore, compared to fiat financial management, cryptocurrency financial management has greater flexibility and the possibility of higher returns. There was a comment on Twitter that DeFi is shouldering the heavy responsibility of saving Ethereum. According to Guru, having a “robot” with transparent rules to provide financial services will form a huge industry and a new paradigm shift. How significant is this!
(Picture source:Block rhythm）
Indeed, recently we have seen quite a few examples of using DeFi to empower the physical industry. For example, the New York-based startup Paperchain uses DeFi to get musicians to advance revenue from Spotify. Prior to that, the practice of packaging assets with insufficient liquidity into bonds was very common in housing and car mortgages. The most famous was “Lehman bonds,” which packaged bank mortgage payments (the bank's future income) into bonds and sold to investment banks' VIP customers. This kind of bond did trigger an extreme boom in US real estate until the bubble burst.
According to data released by the American Recording Industry Association RIAA, the revenue of popular music platforms increased 30% year-on-year in 2018, reaching $7.4 billion. However, it took 6 months for revenue from Spotify to the musicians. [1] Paperchain evaluates the data generated by musicians on these streaming platforms, and then connects the revenue evaluation of these streaming media with efficient low-cost funding sources.
PaperChain, in collaboration with the Maker Foundation and the blockchain project Centrifuge, has successfully lent users Dai, a stablecoin worth 60,000 US dollars. As Spotify's revenue, it took less than 30 minutes to complete the entire process, and the transaction cost was less than 3 US dollars. According to news reports, similar methods of using DeFi to obtain future revenue have begun to be used as an alternative by NBA stars and others. DeFi has indeed shown clear advantages in terms of time and money in these physical applications.
Guru said that currently there are 170,000 addresses in DeFi, which has doubled in 5 months. Many DeFi applications are in high demand, and liquidity is also very good. However, DeFi is still in its infancy. Ethereum is no longer blocked. Gas prices are skyrocketing, and a popular application can block Ethereum. DeFi was severely tested during the 3.12 Black Swan incident. The shortcomings of blockchain infrastructure, that is, the network throughput problem mentioned by Guru, have come to light, seriously limiting the application and development of the DeFi industry.
Prior to the 3.12 incident, contracts on centralized exchanges were blooming everywhere, and the maximum leverage reached 125 times. In the 3.12 Black Swan incident, asset prices around the world fell due to the exhaustion of the dollar's liquidity, causing these contracts to collapse on a large scale, which in turn accelerated the sharp decline in Bitcoin and Ether prices. What is special about the coin industry is that the throughput of the network is extremely congested under extreme circumstances, so customers are unable to fill positions in a timely manner, and contracts are liquidated on a large scale, which ultimately led to a bloody case where investors stepped on each other, and wrote a rich and sad page in cryptocurrency history. On the DeFi side, the rapid decline in ether also caused many contracts that collateralized ether to generate Dai to be liquidated, and Dai's liquidity dropped drastically. Dai, a stablecoin anchored to the dollar, Dai: the dollar rose from 1:1 to 1.12:1.
Guru earned $3,000 when Dai had a 5% premium on the 3.12 day, and also distributed red envelopes to everyone on the Binance platform.
(Picture source:Bitcoins）
In the process of clearing, since the MakerDAO team did not have rich experience, the Dai auction mechanism was designed to start with 0 Dai, but the Ethereum network was congested due to Chainlink's price problem, and many people did not respond and still set gas prices according to normal circumstances, so they blocked most of the bidders. One bidder saw the situation. One bidder saw the situation and got a clever touch. As a result, the bid price was set close to 0 Dai. As a result, Dai of about 4 million dollars was successfully photographed without competition. According to reports, the MakerDAO project is insolvent as a result. After that, the MakerDAO community voted to change the rules, which allowed the Dai auction to run smoothly.
3.12 The Black Swan incident caused a sharp rise in volatility. It was the most severe test the MakerDAO team has faced since its inception. Ultimately, Maker needed to pay off debts settled through the warehouse by issuing additional MKR tokens. Proving Guru's point from another perspective, the impact of network throughput on DeFi projects is critical.
Some people say that DeFi is LEGO, and you can stack them one by one to create limitless ideas. However, the loopholes created when smart contracts interact will provide another excellent opportunity for hackers to launder users' hard-earned money. Gollum overcame mortgage loans on the LendF.me platform. Fortunately, in the end, the hacker dramatically returned all of the stolen cryptocurrencies, worth about 25 million dollars, because their whereabouts were discovered.
In the lendf.me hacking incident that occurred on April 19, 2020, the entire army was almost destroyed simply because of a bug in one of the “building blocks”. The hacker mainly used the imBTC asset ERC777 standard vulnerability to carry out re-entry attacks (after the hacker took out the account balance, the balance was 0, but the hacker also wrote down the previous balance, causing the attackers to keep the balance unchanged after taking out the entire balance. Attackers usually snowball imBTC as a result (until all assets on the Lendf.Me platform are stolen), and the callback mechanism allows hackers to repeatedly use counterfeit imBTC as collateral to lend money.
After summing up the experience, Guru said that users should attach great importance to security audit reports on contract platforms. However, since DeFi is largely an interaction between different smart contracts, even if every smart contract can provide a security audit report, it still does not mean that it is absolutely safe, and users should set an observation period for the project.
Before stepping on lightning, Gulu had been observing the safety situation on the LendF.me platform for 6 months, but after the LendF.me platform was stolen, he thought the observation period should be at least 1 year. Because an influential decentralized product lasts longer, it will attract all kinds of hackers, white hackers, and developers to find ways to break through this contract. At the same time, the larger the amount of capital accumulated in the contract, the more motivated “reckless heroes” are to break through the contract. Long-term effective practical testing can help the platform to close all kinds of bugs of all sizes. Therefore, the longer the contract lasts, the stronger the contract. Therefore, Guru suggests that the upper limit of assets participating in decentralized wealth management products as a percentage of an individual's total assets should be positively correlated with the length of time that smart contracts have been tested in actual combat.
(Picture source:Comparative）
The DeFi field is like a pristine forest. Hackers are monsters in the forest. They suddenly appear silently and suddenly at any time, devour assets on the DeFi platform, and cause the DeFi platform to go bankrupt and liquidate. Therefore, some DeFi projects will set up an admin key to give the operator manual permission to control the smart contract “robot” at critical points, such as shutting down the “robot”, freezing the assets of an account in the smart contract, etc. Uniswap is a project without an Admin Key. The operator does not have permission to interfere with smart contracts in any way, and the “robot” runs completely automatically. Uniswap lost 1,278 ETH (worth about 220,000 US dollars at the time) due to a hacker attack on April 18. Guru said that if a DeFi project has an Admin Key, it will introduce additional risks, which is an issue that cannot be ignored.
How to identify and avoid risks for smart contracts with Admin Key rights?
Guru believes that a responsible operator should actively disclose Admin Key permissions. This can be found in open source code. If the Admin Key's permission is only to shut down the smart contract service, users can still withdraw coins after shutting down. Such a “brake-type” Admin Key permission is protective rather than intrusive. What you need to be extra careful about are those Admin Key permissions that can freeze, transfer, and seize user assets.
Additionally, Guru points out that users need to know whether the project has set a delay mechanism for the Admin Key permission to take effect. The delayed entry into force mechanism is an effective defense method to prevent intrusive admin key permissions from harming users, and it is also a key point for responding to the operator's attitude. For example, MYKEY is a smart wallet, and the KEY ID protocol it relies on currently has a 4-day delay mechanism. In other words, if the operator wants to amend the agreement, it will not take effect until at least 4 days. If the agreement to be implemented is not beneficial to the user, the user has 4 days to choose to withdraw and withdraw all assets. Over time, the delay length of the KEY ID protocol will gradually increase from 4 days to more than 30 days. At the same time, it is also necessary to check whether the operator with Admin Key authority itself is in good standing and whether the jurisdiction in which it is located can play an effective protective role.
Summarizing Guru's views on the DeFi industry, he believes that using “robots” with transparent rules to provide financial services is a new paradigm shift. DeFi is developing rapidly and is a very important trend in the future. The MyKey smart wallet has simplified the entry threshold into DeFi and has a user-friendly interface for users to log in with one click. However, the current low throughput of blockchain networks will limit DeFi's further expansion. At this stage, DeFi and CeFi (centralized finance) will coexist in the market and compete on the same platform in providing quality services. At the same time, platform users need to pay attention to the risks that may be caused by smart contracts setting up an Admin Key, and evaluate whether the platform administrator will easily transfer the user's money. Long-running platforms are relatively better in terms of security. In the process of DeFi development, some rating agencies will appear to conduct risk assessments of these projects for the reference of platform users. The spring of DeFi has arrived, but it still needs to go through a tortuous path before entering DeFi's highlight moment.
Note: [1] “We continue to look for practical examples for DeFi: getting musicians to advance revenue from Spotify”
https://www.chainnews.com/articles/909584663919.htm
By Claire Wu, a writer from Twitter
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