Introduction to Decentralized Finance

Introduction to Decentralized Finance

May 26, 2020 Uncategorized 0

We are the Definity Labs. Decentralized Finance Leaders: We develop our own decentralized applications to better our community, while also keeping our community informed of the latest events happening in the DeFi ecosystem.

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“We Have Zero Intention of Following the Path of Maker Towards Permissioned Assets:” Synthetix’s Kain Warwick

A fully permissionless and decentralized stablecoin is one the most important pieces an open financial system should be building, says Kain Warwick, the founder of synthetic assets trading platform Synthetix. As of recently MakerDAO was the main project focusing on such a system, but it recently began to advance towards a more centralized model, by adding assets that rely on third parties such as USDC. Warwick is taking a stand: Synthetix is going in the opposite direction. While today Synthetix is further from the fully decentralized end of the spectrum than many DeFi projects, its road map is for the Synthetix team to increasingly transfer control of the protocol to its community. Warwick pledges to never include permissioned assets, such as fiat-backed stablecoins.

Cosmos

Contributor: Chjango Unchained, Director of Community at Cosmos

  • From 1 to 4 teams: What was once a single-celled ‘organism’, the Cosmos core development team has divided into multiple ‘organisms’. In other words, the Tendermint team multiplied last March into these distinct teams with distinct responsibilities:
    1. Tendermint Inc is responsible for the Cosmos SDK and ecosystem development of Cosmos.
    2. Interchain Foundation manages grants to teams building infrastructure towards the Cosmos vision.
    3. Interchain GmbH maintains Tendermint Core and leads the development of Interblockchain Communication (IBC), the flagship chain-agnostic protocol for communicating value and data across blockchains.
    4. Iqlusion is responsible for running Game of Zones.

    I know—it’s a lot to take in. In short? This is unprecedented in the industry. The implication for Cosmos? This move arguably decentralizes the core development team by having multiple entities working on the same project, but without a core team intact, it inevitably increases coordination friction. But isn’t enabling social coordination what blockchains are all about?

  • Game of Zones was initiated in the first week of May. There were 183 registrants with ~130 who successfully spun up testnet chains to make IBC connections at the beginning of the games. Teams and connections visualizer can be seen below (source). However, after a software upgrade, a fatal bug crashed the incentivized testnet game. A postmortem of the event can be read here. The next phase of Game of Zones is restarting May 18th after the bug fix is merged into the software.

  • The peg zone, or bridge space is a-booming! ChainSafe announced yesterday that it’s launching ChainBridge, which will function as one of the several 2-way peg zones between not only Cosmos and Ethereum but for many other related blockchains. This peg zone model builds from the initial Peggy architecture that we laid out for Cosmos in early 2018. Many dev shop projects have since picked up the torch on building these chain bridges. ChainSafe’s ChainBridge is one of many Cosmos <> Ethereum 1.0 bridges that will coming down the pipeline soon. Althea is launching their version of the peg zone, or ‘Peggy’, and they are “optimistic” about deploying one in the near future (full story here).And that’s not all there is for the bridging economy. Swish Labs is coming out with their own version of Peggy, giving this cross-chain network at least 3 bridges to start with by the end of 2020. If one were to analogize these peg zones to toll roads, then this multi-bridge system gives the user many different IBC options and fee models.
  • Cosmos governance is on its 25th proposal—and a rather significant one, at that. Prop 25 seeks community approval for CosmWasm to be integrated into the Cosmos Hub. If passed, it will enable faster feature integration for the Cosmos Hub post-IBC launch and will introduce a constrained form of smart contracting on the Cosmos Hub. Voter turnout is so far at 32% with a 99% Yes vote (source).

Comparing Public Attitudes about Bitcoin Adoption from 2017 – 2020

1. Comparing Bitcoin to other forms of financial assets, would you prefer $1,000 of Bitcoin or $1,000 of… ?

  • government bonds
  • stocks
  • real estate
  • gold
Bitcoin Preference Chart

Comparing Bitcoin to other forms of financial assets, would you prefer $1,000 of Bitcoin or $1,000 of… ?

Commentary

Over 45% of respondents would prefer to own Bitcoin over stocks, real estate and gold, an increase of 13% over the 2017 baseline. Although confidence in BTC dropped marginally in the 65+ age group, among millenials confidence has increased dramatically against three asset classes: government bonds, real estate, and gold. There has, however, been a slight increase in confidence in stocks against BTC.

The most dramatic increase is in the number of male millennials who would now prefer to own BTC over government bonds. In our survey, the number of male millennials expressing this preference surpassed the 50% mark, the first time that a majority has expressed confidence in this way.

While Bitcoin has experienced multiple cycles of volatility since 2017 it has still remained the leading alternative asset preserving its original roots as a hedge against traditional financial markets. This growing confidence is demonstrated by an enormous increase in public confidence towards BTC as an asset class.

We also notice a drop in public confidence towards traditional financial assets like stocks and bonds. Perhaps compounded by the recent COVID-19 market fluctuations we see the BTC narrative strongly supported whenever central banks print money.

Introduction to Decentralized Finance

Welcome to the beginning of our research series on DeFi! We hope you will come to understand the world of decentralized finance more after reading this report.

Key Takeaways

  • Decentralized finance, or DeFi, refers to financial services, including lending, exchanges, investment, stablecoins, and more, that are built on public blockchains and smart contracts, most commonly Ethereum;
  • The main benefits of DeFi is that financial services become trustless, censorship resistant, permissionless, and open source. DeFi can in theory make platforms more secure, more resistant to manipulation, accessible for anyone, and transparent;
  • Although most DeFi protocols have achieved a high degree of architectural decentralization, full political decentralization is hard to achieve. As such, most protocols are still partially centrally governed by central developer teams or foundations;
  • The most popular use of DeFi is for borrowing and lending, allowing users to put their crypto assets to work to earn interest;
  • DeFi’s main drawback is smart contract risk, where an attacker could exploit vulnerabilities in smart contracts to steal user funds. However, we believe any attack presents an opportunity for DeFi to mature and improve security practices;
  • Other drawbacks of DeFi are that it is limited by blockchain throughput and that there could be regulatory oversight on the horizon since it currently operates in a regulatory gray area. Improvements in these areas could help DeFi grow further
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