The Battle for the Soul of DeFi
Trustless vs. Scalability
You are forgiven if you’ve done nothing over the last 48 hours but watch the 20% drop in ETH and BTC. Amidst the carnage, the DeFi and Ethereum ecosystems have spent their days hurling insults and debating hotly contested issues.
On the DeFi side, Rune Christensen, the CEO of the most visible project in the space, MakerDAO, jumped in a discussion about Maker including “non-trustless assets” in the new version of Multi-Collateral Dai (MCD).
Is ETH enough to scale? For those just catching up, under the current MakerDAO Single-Collateral Dai (SCD) system, only ETH can serve as collateral. The Maker team has long advocated the inclusion of additional assets as a way to help the stablecoin grow and diversify, but the potential collateral was intended to be other native crypto-assets, as Maker laid out in their blog on MCD in July.
The recent discussion on Reddit and Twitter appears to be laying the groundwork for Maker to include centralized digital assets, or cryptoassets who’s value is dependent on an off-chain 3rd party. This would include "security tokens" and centralized stablecoins.
For many in the Maker (and DeFi) community, inclusion of such assets would put the ‘trustless system’ at the whim of any regulator. In short, is Maker preparing for KYC?
Maker CEO Rune with a prescient response on Twitter:
Know-Your-Reality What no one in crypto wants to admit is that BTC and ETH are BOTH KYC’d. Mixers and privacy coins may change that in the future, but with the investment in blockchain analytics companies, like Chainalysis, and the consolidation at quasi-regulated exchanges that are all KYC’d, any government that wants to know the identity of an ETH or BTC address can figure it out. Maybe that’s scary, or not. We’ll see!
The Judgment of Solomon Compromise. At the moment, it appears that Maker will try to implement a ‘trustless Dai’ and a non-trustless Dai. This seems to be a happy medium that assuages DeFi bulls, who think that DeFi’s core value proposition is its insulation from centralized control and those that think Dai (and DeFi) needs to scale and adapt to the market it’s trying to penetrate.
Miners vs. Investors vs. Core Devs vs. Users & Buidlers
Another one? Before Rune tried to solve multi-collateral Dai, he waded into a perhaps more controversial topic: ProgPow. ProgPow is a contentious upgrade proposal that is supported by Ethereum miners with tepid support from Ethereum core developers and antipathy from Ethereum Twitter.
Specialized vs. Generalized Miners In short, ProgPow is a proposal to alter the hashing algorithm that Ethereum miners use for Proof-of-Work. From the beginning, Ethereum hoped to rely on GPU (general-purpose use) miners as opposed to ASIC (application-specific) miners, which power mining on Bitcoin and other blockchains. Whereas GPUs can switch to any blockchain, ASICs are effectively useless if the algorithm changes. But, when performing its intended task, ASICs are much more efficient than GPUs.
Dharma COO summed up the conundrum rather well:
This sounds awfully familiar with the block size debates that plagued Bitcoin until the BCH schism in July 2017.
For many, ASICs are anathema to the basic tenets of decentralization. In a perfect world, all blockchain mining could be done by a laptop, but when you’re printing money out of a machine, people are going to try and figure out how to make the machine more efficient.
Monero has been in a never-ending cat and mouse game with ASIC miners and it’s not clear that they can win. Most annoying, however, is the ETH2.0 and the impending switch to Proof-of-Stake (POS), which would make the whole ProgPow debate moot.
No one knows how this will shake out, but both sides are threatening a hard fork. While a fork is unlikely, this will surely be a test of “Ethereum Governance”. If the Bitcoin block size debate proved anything, it’s that users and network participants close to users (wallets and exchanges) are the determinants of the ‘correct’ blockchain.
So, how does this fit in for DeFi? Jake Brukhman of Coinfund put it succinctly:
Tweet of the Week: Currency = Capital?
Paradigm's Dan Robinson and others on an interesting Twitter thread about the efficiency of capital vs. currency and how it relates to proof-of-stake. Most interestingly, James Prestwich sums up the debate - and indirectly ties it to DeFi - by pointing out that "a more general principle is that you can't lock up capital assets. You can only increase the friction of transacting
Chart(s) of the Week: Moving from Maker to Compound
ETH's sharp decline has led to a decrease in ETH locked in Maker and a corresponding increase in the amount locked in Compound, according to DeFi Pulse. Users (or investors) are sticky, but a significant market change moves all. The amount of Dai locked in DeFi also changed significantly with Fulcrum seeing inflows as its deposit rates spiked to 18% on Tuesday.
Number of the Week: Liquidations spike
The amount of liquidations across lending protocols in the 24 hours after ETH's drop, according to Loanscan (HT The Defiant). Sudden price declines invariably lead to liquidations on loans because the value of the collateral has dropped below the value of the outstanding loan. Typically, anyone can liquidate a position once it drops below the threshold. Just waiting for the DeFi Rek.to.
Long read of the week: Rational Actors can't be trusted
Bryan Ford, professor at EPFL, in a deep dive into the assumptions girding all cryptoeconmic systems. As blockchains' economic importance grows, their attack vectors can no longer account for the economic actions within the system. DeFi oracles will face similar obstacles.
Odds and Ends
New DEX, Dolomite, launches on Loopring with negative maker fees Link
Layer 2 payment channel, Connext launches V2 on mainnet Link
ProgPow Trello board of key arguments for and against Link
Key takeaways fro DeFi Summit in London Link
DeFi wallet Zerion announces support for Uniswap liquidity pools Link
New liquidity pool-based DEX announced, Balancer Link
Filecoin arises from its slumber and announces a mainnet launch in 2020 Link
(Beta) Uniswap offers limit orders (Link), hosting on IPFS Link
Thoughts and Prognostications
Understanding PLONK [Vitalik]
Ether is the Best Model for Money the World has Ever Seen [David Hoffman]
The difference between Fintech and DeFi [RTrade]
DeFi Series #2 - Arbitrage and Carry Trade Strategies [Binance]
Utilization rate and the optimal model for pool-based DeFi Lending [Divine]
A fifty-year history of Facebook's Libra [JP Koning]
Trading and Arbitrage in Cryptocurrency Markets [LSE/MIT]
Listen of the Week: The internet and crypto comparisons
"There’s an ideological component. Immutability is a thread that runs through all of crypto, especially for the old school people that have been around for a long time. This idea of change is scary.
Whereas if you look at the traditional start up world, the idea of pivoting and product-market-fit is part of the DNA"
Synthetix CEO Kain Warwick on the invaluable EthHub podcast discussing why Synthetix pivoted from a stablecoin to synthetic assets. Synthetix is the ICO darling of the DeFi space and is a good testament to skating to where the puck is going to be.