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Systematic Fragility in Decentralized Finance

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With the start of a new decade, a new wave is affecting the global financial system, the wave is of decentralized finance protocols. The ecosystem has already packed a value of $1.2 billion in 2020.

Though the platform has a huge and revolutionary potential yet it is in it’s developing phase and is immature and thus there are several common vulnerabilities which do not make the platform unsafe for users but a cautious place for them to be and so here are few risks from which the users should be aware to make an informed decision.

Centralization:

The name pronounce os Defi is Decentralized Finance but according to a source, most of the Defi apps depend on the centralized entities for their operation in one way or the other, in that source there was a part mentioned where it stated that anyone having the access of Compound admin key can drain all the platform’s lending pools.

In the case of lending protocols, there is a different concern. A metric named “utilization rate” is used in a  Compound in which the percentage of the staked funds that have been lent out in a moment is described. The higher the percentage the greater the risk of a liquidity crisis getting triggered. This risk is minuted by the compound through its interest rate model which adjusts according to the utilization rate.

Market Manipulation

The market of Defi is still vulnerable to manipulation tactics as Defi is currently unregulated. The tactics are.

Frontrunning:

In blockchain when there several transactions waiting to enter a block and become confirmed, they are queued in a mempool which is visible to any trader, The trader can enter in with their own trade and can get a higher gas fee, by this the miners will more likely select them for inclusion in next block rather than first transaction.

Oracle Manipulation:

 When a Defi dApp uses only a single or double exchange as an oracle the price information provided by an oracle can be manipulated by traders by trading large transactions since the liquidity on that exchange is very less it is easier to manipulate the price, the traders make leveraged trade on the manipulated price and reap maximum profit.

Account Security:

When any user is using or investing in a Defi dApp, their funds are being transferred into another user wallet and the transaction is governed by a Smart contract but this all happens through a dApp and it can also be a possibility that someone, somewhere, has private keys to the wallet

The measures which are used to prevent funds from hackers are such as multi-signature security and time locks, however, it is impossible for any user to be assured totally that these methods are being applied as the Defi teams are very secretive about their practices. Multi-signature is a measure visible to the user but again there is no proof that not even a single individual has access to all the signature which is required for transactions. 

It is being assumed that as the Defi area matures the developers may advance their security modules.

Ethereum Dependency:

Scalability is the biggest weakness of Ethereum and still, most of the Defi is still dependent on Ethereum. The transaction speed in Ethereum is around 15 TPS, and Ethereum is able to keep up with the transactions of stablecoin 

Ethereum 2.0 upgrade which is promised still may take a few years and that too it is not sure that the current issue will be alleviated or not. So, for now, the dependence of Defi on Ethereum can be considered a fragility.

Conclusion:

All these fragilities and drawbacks are not necessarily the reason for the users to run scared away from Defi, the crucial part for the users is “do your own research” before getting involved with Defi. The users should understand the risks involved when investing in crypto and related applications and then take the calculated and measured approach to minimize the risks.


At QuillHash, we understand the Potential of Blockchain and have a good team of developers who can develop any blockchain applications like Smart Contracts, dApps, DeFi, DEX on the any Blockchain Platform like EthereumEOS , Stellar and Hyperledger.

For further discussion and queries on the same topic, join the discussion on Telegram group of QuillHash — https://t.me/quillhash.

The post Systematic Fragility in Decentralized Finance appeared first on Quillhash Blog.

Source: https://blog.quillhash.com/2020/02/28/systematic-fragility-in-decentralized-finance/

Blockchain

Crypto ETP Trading Volumes Plunged 74% Over the Last Month

Cryptocurrency exchange-traded product (ETP) trading volumes have plunged over 74% in the last month, as the prices of these products have also been dropping. According to cryptoasset data aggregator CryptoCompare, in its newly launched The Digital Asset Management Review, exchange-traded products dropped 74% over the last month from $186.5 million in mid-August to an average […]

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Cryptocurrency exchange-traded product (ETP) trading volumes have plunged over 74% in the last month, as the prices of these products have also been dropping.

According to cryptoasset data aggregator CryptoCompare, in its newly launched The Digital Asset Management Review, exchange-traded products dropped 74% over the last month from $186.5 million in mid-August to an average of $48 million in mid-September.

An exchange-traded product, it’s worth noting, is a type of security that tracks other underlying securities or an index. The document notes that Grayscale’s Bitcoin Trust product, GBTC, represented the “vast majority” of ETP volume and as such accounts for most of the decrease in trading activity.

The top three ETPs were Grayscale’s Bitcoin product, and its Ethereum Trust (ETHE and Ethereum Classic Trust (ETCG), and traded a combined $180 million per day in mid-August, and just over $40 million per day in mid-September.

Throughout the last 30 days, CryptoCompare adds, crypto ETP trading activity generally declined. If we exclude over-the-counter products – like GBTC, ETHE, and ETCG – the largest product was ETCGroup’s Bitcoin ETP (BTCE), which traded o Deutsche Boerse XETRA. Other large cryptocurrency ETPs include 3IQ’s QBTC product which trades on the Toronto Stock Exchange and BTCW by WisdomTree which trades on Six Swiss Exchange.

Over the last 30 days, Grayscale’s BTC and ETH products represented the largest average daily trading volumes at $49 million and $7.4 million respectively. These experienced significant losses over said period, dropping 20.4% and 43.4% respectively.

After Grayscale’s products, which often trade at a premium compared to their underlying assets, BTCE saw average trading volumes of $864,000 and experienced a near 9% drop over the last month.

It’s worth noting that the price of most top cryptocurrencies, including bitcoin and ether, dropped significantly over the last 30 days after BTC saw a breakout above $12,000 get rejected.

Featured image via Pixabay.

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ConsenSys-Incubated Startup Releases In-Browser Atomic Swap Wallet for DeFi

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On Thursday, ConsenSys-incubated startup Liquality released a new wallet that lets you atomically swap digital assets directly from your browser.

The Liquality Atomic Swap Wallet can act as a trustless alternative to current methods of porting cryptocurrencies into the decentralized finance (DeFi) space due to the peer-to-peer (P2P) nature of atomic swaps, Liquality co-founder Thessy Mehrain told CoinDesk in a phone interview.

The wallet interacts similarly to cryptocurrency wallet MetaMask, but with an entirely different end-game: swapping assets trustlessly.

“It’s called a chain abstraction layer, which basically is a way of making different blockchains talk the same language and interact,” Liquality co-founder Simon Lapscher said.

Liquality’s wallet leans on atomic swaps and hashed time locked contracts (HTLC), a cryptographic escrow scheme that allows two parties to swap assets without trusting the other party. HTLCs are also the foundation of Bitcoin’s second-layer payment scheme, the Lighting Network. 

Notably, atomic swaps let investors hold onto their private keys throughout the entire exchanging process.

Mehrain and Lapscher believe these swaps can act as a trustless alternative for DeFi investors looking to bring value from one blockchain to another. To date, over $1.1 billion worth of bitcoin has been tokenized on Ethereum.

Yet, investors have increasingly relied on private firms to bring value from other blockchains to Ethereum’s DeFi markets. 

Current methods of transferring value from Bitcoin to Ethereum, such as BitGo’s wrapped bitcoin (WBTC), require third-party custodianship. P2P atomic swaps, on the other hand, do not.

Liquality itself currently acts as the counterparty to all wallet swaps, with advanced users having the ability to choose other counterparties. The startup makes revenue acting as market maker for swaps, Lapscher said.

Enough adoption should create sufficient network liquidity within the wallet to allow Liquality to disinvolve itself entirely from the process, he added.

Source: https://www.coindesk.com/consensys-liquality-atomic-swap-wallet-defi

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Binance Chief CZ Talks DeFi, Ethereum 2.0, And More

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The Binance chief CZ is in the latest cryptocurrency news for remaining skeptical about Ethereum 2.0’s features. As he said, the decentralized finance space is in full swing, and one of its biggest supporters appears to be exactly the exchange Binance. The platform and its United States branch recently joined the Chicago DeFi Alliance, with a main aim to further develop the US DeFi industry.

Additionally, the Binance news show that support for new DeFi projects continues to grow. Most recently, the exchange has demonstrated its close ties with BurgerSwap, which is a new decentralized exchange that aims to improve upon the Uniswap project.

The Binance chief CZ has been bullish on DeFi for a while. In a recent interview, he expanded on his opinion and said more about why this sector has started taking off, as well as what we can expect from it moving forward. When asked about why DeFi is hot right now, the Binance chief CZ said:

“The automated market makers use a pricing mechanism that follows a curve. So, they hold a constant ratio of different assets in the liquidity pool. This type of curve with automated market making has a strong advantage, being that is very transparent. If I lose money, I know why. So, there is potential for users to lose money, but they know exactly why. There’s not a lot of cheating going on.”

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Zhao also attributed Binance’s involvement with DeFi and said that the exchange lists DeFi tokens fairly aggressively. He also said that right now on Binance.com, there is a liquidity swap product and the target users are more so the novice users who don’t want to hold their own keys because they are afraid of losing them.

When it comes to the decentralized side of things, the Binance chief CZ mentioned that they have been working on Binance Smart Chain for over a year, describing it as “an Ethereum-compatible smart contract.”

“Feature-wise, it’s 100% compatible with Ethereum. But speedwise, it is actually much faster, which helps reduce the high gas fees and traffic congestion problem on Ethereum, given the increased traffic that DeFi has brought. Binance Smart Chain is another offering we were putting out there to allow developers to launch their DeFi projects very easily.”

When asked about Ethereum 2.0, CZ said:

“I think Ethereum 2.0 is really hard to deliver. It’s just one of those things that need full features and very high flexibility. Also, this has to run on a laptop with high speed, and you want it to be decentralized. Those problems are hard to solve.”

DC Forecasts is a leader in many crypto news categories, striving for the highest journalistic standards and abiding by a strict set of editorial policies. If you are interested to offer your expertise or contribute to our news website, feel free to contact us at [email protected]

Source: https://www.dcforecasts.com/binance-news/binance-chief-cz-admits-buterin-talks-defi-ethereum-20-and-more/

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