The DeFi Crypto Landscape and Elastos’ Future Role
By Jeremy G
Traditional finance has been revolutionized by the crypto space.
Decentralization, ownership of funds without 3rd party control, are trends on the rise–and decentralized finance, commonly referred to as “DeFi”, has increased exponentially as a sector in the past year.
Decentralized exchanges, decentralized stable coins, and decentralized lending platforms have enabled DeFi to become an acceptably liquid young industry. While companies in DeFi have achieved growth, there are still lingering issues that need to be solved in order to fully thrive.
Decentralized exchanges, or DEX’s, are at the forefront of attention, especially on the Ethereum platform. IDEX has led with the most volume followed by ecosystems such as Kyber Network and Bancor. Synthetix exchange allows ETH users to trade synthetic assets such as gold or stocks. Dydx exchange will be including Bitcoin perpetual contracts on its platform. Prediction market project Gnosis is even incorporating Covid-19 forecasts into its services. Centralized exchanges like Binance still gain the most daily volume. However, decentralized exchanges are slowly building up more of a user base with features and performance that competes with the CEX’s.
Stable coins have been in the news recently regarding whether they will be banned or not.
Regardless of the regulatory uncertainty, the Ethereum based stable coin market has nearly doubled year to date. The top 3 stable coins, Tether, USDC, and Dai, capture most of the market, with USDT leading the way. In a Digital DeFi live stream, a graphic was shown illustrating the coin usages of the three throughout the crypto ecosystem:
Tether dominates most of the centralized exchanges. Dai has been transacted in most of the decentralized exchanges. USDC is somewhere in the middle.
Coinbase and Binance are the main gateways between all three stablecoins.
A moral and philosophical question hovers over stable coins. Dollar backed coins like Tether and USDC allow traders and investors to maneuver in and out of the highly volatile crypto market. These USD coins are quite convenient, but they are simply “decentralized” versions of a centralized banking system.
Many in the crypto space want to do away with traditional finance, and thus they gravitate towards more decentralized sound money. Multi Collateral Dai from MakerDao is supposed to be the decentralized answer to the dollar pegged stable coins. Dai is backed by Ethereum, Basic Attention Token, along with USDC. As the price of Dai goes up, more is produced in the market to keep it stable. As the price of Dai goes down, then it’s burned in order to get back to the $1 equilibrium. The success of ETH and BAT along with the bank-backed USDC is what influences Dai’s price; the former two are most highly correlated.
Other projects are doing away with any collateral based money and relying on oracle data such as purchasing power of the dollar and CMI like Ampleforth’s AMPL. As with exchanges, the centralized stable coins are being used the most. With the US pegged stable coins most convenient, they will most likely lead in usage if/when the US dollar starts to devalue.
As MakerDao is the leading decentralized lendor in the world, dominating over half of the market with around $375 million locked up in Collateralized Debt Positions, or CDPs. Other projects are looking to enter the lending space, too.
Tron just came out with their own Makerdao competitor. NEO uses Alchemint as a stable coin lending platform and the ETH/NEO DEX Switcheo has also announced a stable coin integration on their exchange. A Binance incubator lending service, Kava, based on the Cosmos Blockchain SDK, will look to go live with their platform in May 2020. Lots of centralized exchanges allow users to borrow crypto and repay at a certain interest. Ultimately, people are gaining a bit more access to funds through crypto lending services. Many of these platforms, MakerDao again for example, have offered interest up to 8% holding Dai. Other services like Nexo give extra staking rewards for holding its native token, NEXO.
While hundreds of millions of dollars are being locked in DeFi platforms, there was an incident on March 12th called Black Thursday when the price drop of ETH led to mass liquidations, especially on MakerDao. Kava’s CEO Brian Kerr said there were a couple reasons for the recent incident in this Blockchain Brad interview:
“First, Oracles stopped as many were liquidated, and secondly, there wasn’t enough liquidity and access to Dai and MKR during the crash.”
After these liquidations were triggered, auctions occurred on Makerdao. Because of the massive amounts of transactions clogging the ETH network, and several auctions happening at once, the GAS fees were very high and 50 ETH auctions were going for 0 Dai. Ultimately, Brian Kerr feels that without the proper market makers, depth, and assets being leveraged, there will be another Black Thursday again, someday.
Ampleforth’s Evan Kuo wrote an article speaking of Maker’s overall dilemma with Dai, “Today, decentralized banks like MakerDAO compensate for the high volatility inherent in decentralized base-monies by over-collateralizing, often locking up several times the amount they aim to represent. Even still, risks of auto-liquidation loom ever-present.” Over-collateralization and hyper-correlation to the ETH assets are inherents risks to healthy CDP’s on MakerDao. The base monies of these lending platforms will be interesting to follow as the economic landscape changes in the coming years.
Even with all the criticism being thrown towards MakerDao’s way, the project has taken measurable steps to prevent another Black Thursday. In an article written by Danger Zhang, he explains adjustments made to the protocol in governance:
Auction times were lengthened from 10 minutes to 6 hours to give liquidators more time to purchase ETH with Dai in even the most drastic market conditions. The stability fee was reduced to 0.5% in order to make it cheaper to mint Dai, providing better liquidity. The Dai Savings Rate (DSR) has been reduced/eliminated. Since Dai locked up in DAR was not available in secondary markets, this increases the overall liquidity in unlocking them. USDC was added as a non-volatile collateral for Dai. The Makerdao governance changed their Security module delay time from 24 hours to 4 hours to react more quickly to an unforeseen event. And finally, a Liquidation Freeze Module was introduced which freezes liquidation auctions temporarily in order to provide more time and liquidity to liquidators. All these measures give more time and liquidity in the event of an ETH crash. A state of the peg update was posted on Reddit to address the health of Dai and the Maker ecosystem. Some interesting developments are adding LINK, WBTC, and TUSD, amongst other coins to diversify collateral on the platform amongst many other measures. Even better news is that DeFi Automation solution DeFi Saver not only protected most of its users from liquidation, but released an update recently which makes the system much more resilient and would keep people afloat in a future crash.
Although measures have been taken in Makerdao’s governance to improve its platform, there still lies the question of dependable and reliable price Oracles. As stated in the DeFi Saver update above, “We still don’t have access to Maker’s next price on-chain, as they need to provide permission to DeFi Saver smart contracts for this to be possible, even though the value is already available on-chain.”
Without the permission and access to prices, there’s uncertainty with Maker’s price Oracles. Coinbase has launched a new price Oracle in order to establish accurate data throughout the DeFi space. They claim their reliability and security will prevent attacks and price manipulation in the future. Chainlink boasts the largest collection of on chain data on Ethereum. Their Price Reference data which allows 25+ price references is secured by its network. Other crypto Oracle solutions such as Tellor exist, striving to be a more decentralized solution to Chainlink or Coinbase with their services. The race to reliable and secure Oracles is on which will solidify DeFi for the future, especially as exploits in DeFi have been well documented as this tweet from Camila Russo demonstrates.
Elastos VP of Development Clarence Liu shed some light on the pros and cons of Security Auditors in DeFi:
“Like the tweet says, we just need better security auditors…like DeFi product X should not be used unless it’s been audited by a set of trusted companies. That’s the standard, but then we’re back to semi-centralization since no one would use products not approved by the standards committee. The alternative is a free market where we let the buggy DeFi run rampant, and it’s survival of the fittest.
“As we can already see, that experiment isn’t working so well with each hack scaring potential traders. DeFi does hold potential to be nearly completely bulletproof, though; even Bitcoin in its early stages was vulnerable to attack. There will undoubtedly be innovations in this field such as more comprehensive formal verification, improved oracles, and transparent DAOs oversee and maintain components at critical junctures.”
DeFi is certainly an exciting budding ecosystem in the crypto space. However, it takes resources and liquidity in order to break into the space. Clarence has a few ideas for DeFi on Elastos, but first he wants to make clear that there are no significant efforts or free resources to work on DeFi in Elastos right now. There are a few clear initiatives and obstacles Elastos (and other crypto projects) must address before anything can get started:
“The first and most obvious initiative is to open the DPoS Supernode staking rewards scheme to the entire DeFi community. With a 6-7% annual return on investment and built on one of the most secure blockchains, manipulating the DPoS rewards would be more difficult than hacking many other DeFi protocols.
“After all, the Elastos merge-mining network constitutes approximately more than half of Bitcoin’s hashrate, and those miners in turn automatically payout the DPoS rewards to Supernodes whose ranks are immutably published on the blockchain.
“The flaw with the Elastos DPoS Supernode scheme is that the stake is in ELA, a token subject to high variance. This presents a serious issue as a drop in ELA value would quickly wipe out any potential gains from staking. This is in stark contrast to other DeFi staking platforms where you stake a stablecoin such as DAI.
“Solutions to this must involve some intermediate decentralized system that absorbs some of the risk for a cut of the profits. This is no small feat to develop, and also why, as much as I would like to see DeFi development, no one will attempt it until there is stable funding and a good set of engineers.
“If we don’t build this properly we could join the ranks of hacked DeFi projects.
“This also exposes another key aspect of DeFi systems that must be understood; many times the system – in our case Elastos – is solid, but such a system may rely on an outside source to provide the ELA price or have a weak point such as this intermediate risk management solution. Therefore, regardless of how robust the Elastos ecosystem is, no technology can guarantee that external components or data is bulletproof.
“Even if we built an attractive investment platform around our DPoS Supernode scheme, we will have to design it properly. Perhaps having a new DAO that ensures decentralization is maintained is the solution, which is one key concern the community has on staking pools. Ideally, CRC can fund a sub-committee or sub-DAO, if you may, to absorb some of the risk of the DeFi ecosystem. Such a DAO would function similar to the central banks of governments, but in a transparent and decentralized manner. This is one other large component that needs to be built as part of our DeFi infrastructure if it were to happen.
“The next thing we would need is to build a bridge to move wrapped tokens bidirectionally between the Elastos ETH Sidechain and the Ethereum network where most DeFi currently exists. Of course we can connect to many other chains, too. This part is actually relatively easy. Elastos naturally has a set of nodes that can act as bridge nodes for cross-chain transfers, which of course are our elected DPoS Supernodes. In fact, Elastos has already built proof-of-concepts internally, but in this case the challenge isn’t technical; it’s a market problem.
“We could actually get “wrapped” ELA tokens on the Ethereum network that are ERC20 tokens tied 1:1 to ELA on our mainchain, but the real challenge is building the rapport and trust by projects in the Ethereum network. Unfortunately, this is not something Elastos has been investing much effort in.
“Admittedly, Elastos took a more competitive stance to other projects, which was understandable in the early stages in order to stand out. But going forward alone has handicapped us when it comes to participating in the broader DeFi discussion. In the future, the Elastos ETH Task Force will advocate being more collaborative, building more partnerships with other DeFi projects.
“Another early hurdle that Elastos faces is building up its DeFi trading volume, our key exchange partners are definitely supportive of Elastos’ goals of being involved in DeFi, but unless our wrapped ELA token generates significant volume, they would not be able to list us. This is obviously a key milestone. By having our wrapped ELA ERC20 token listed, projects on the Ethereum network will more easily trust the wrapped version ELA and know there is liquidity there. The takeaway here is that Elastos or CR needs to fund and build DeFi projects, and we need to gain recognition before we will be welcomed to the DeFi ecosystems.
“In terms of other DeFi projects that Elastos could build to establish a presence, there are many possibilities. We could tokenize physical assets similar to Synthetix, issue our own stablecoin like MakerDAO, or build our own DEX and connect to different blockchains and do the settlement on Elastos. To be honest, we’ve made progress internally. MakerDAO, Chainlink, Band Protocol and others in the DeFi space have all had talks with us and are aware of Elastos, but realistically we have to commit and take the first step. So for now the ETH Task Force is working on a proposal and budget to present to the new CRC all the steps I have described. I can’t comment on tokenomics or price too much, but from what I’ve described, it should be easier to understand that the price tag won’t be low as there is a lot to build and it requires continued effort.
Elastos has recently joined the REN Alliance. They have taken action in minting wrapped ELA (WELA) with strategic partner REN. RenVM has built a decentralized Multi-Party-Computational network of nodes that lock the funds and mints the WELA. Being backed as a Ren token should immediately help gain recognition as a trusted token. Another added feature with the RenVM is being able to change the end point to the other side of the bridge. Making this change allows other tokens such as BTC, BCH, ZCASH, etc. to transfer to the Elastos ETH side chain. Lastly, Elastos and Ren will likely have hackathons together. Ren is a cross-chain solution and Elastos wants developers building cross-chain dApps with Elastos. Cyber Republic Global Regions fund could potentially help expand these hackathons.
Real world trading firms are showing interest in DeFi, but they are struggling with liquidity and trust as this article describes. While traditional markets may be watching on the sidelines, startup crypto lending platforms like Atomic Loans are still getting millions of dollars in funding. The space is expanding with more and more money being put into it everyday. People in crypto are always in search for the killer dApp.
We DeFinitely have to think more about this burgeoning space.