If you’ve been following Ethereum’s developments at all over the past few months, you’ve likely heard of (and potentially experienced) the growth in the blockchain’s decentralized finance (DeFi) ecosystem.
Decentralized finance, which is effectively the migration of financial services offered by banks onto a blockchain-based ecosystem (decentralized lending, decentralized margin trading, etc.), has been hailed as Ethereum’s “killer use case,” for it has the potential to draw in a colossal number of users.
A Coinbase product manager, for instance, said that DeFi is likely going to be the crucial part of the cryptocurrency and blockchain ecosystems moving forward:
“DeFi, or decentralized finance, is an essential part of an open financial system. DeFi tools are censorship-resistant, unbiased, programmable, and available to anyone with a smartphone. For this hackathon, we’re focusing on bringing DeFi to the world.”
DeFi, or decentralized finance, is an essential part of an open financial system. DeFi tools are censorship-resistant, unbiased, programmable, and available to anyone with a smartphone. For this hackathon, we’re focusing on bringing DeFi to the world. (Costumes not required.) pic.twitter.com/6zhnd8gCXa
— Coinbase (@coinbase) December 9, 2019
Unfortunately, not all crypto execs agree that financial services on Ethereum and other blockchains are really the future.
A Decentralized Finance Debacle
This weekend, reports revealed on Twitter that a DeFi protocol based on Ethereum named bZx suffered what some dubbed a “hack” or “attack“.
Per a breakdown of the event by DeFi Pulse, a data provider tracking the DeFi ecosystem on Bitcoin and Ethereum and other blockchains:
- The attack saw a user take a 10,000 ETH “flash loan” from a DeFi platform and deposited funds into other protocols.
- 5,000 ETH was deposited into Compound for a 112 coin loan to be withdrawn of Wrapped Bitcoin (a large portion of the supply), which are Ethereum-based representatives of BTC.
- The rest of the coins were used to short WBTC on Fulcrum. The WBTC was then sold on Uniswap to push the price of the coin lower, DeFi Pulse wrote, to allow the short to be covered at a profit.
- DeFi Pulse suggested that this “situation” allowed the transactor to make away with a large profit of over $300,000.
Litecoin Creator Charlie Lee Isn’t Convinced of DeFi’s Promise
As this situation involved a large amount of capital, it was quickly publicized on Twitter. And as such, some prominent individuals in the cryptocurrency industry took notice.
Charlie Lee, the creator of Litecoin and a former team leader at Coinbase, said that this situation is “why I don’t believe in DeFi,” noting that the fact bZx managed to lockdown its contracts in the wake of the situation is a sign that the term “DeFi” is just a misnomer.
Lee concluded his thought on the situation by questioning if DeFi is really better than what exists in finance today.
This is why I don't believe in DeFi. It's the worst of both worlds. Most DeFi can be shut down by a centralized party, so it's just decentralization theatre. And yet no one can undo a hack or exploit unless we add more centralization.
So how is this better than what we have now? https://t.co/F1HMSeqb6q
— Charlie Lee [LTC⚡] (@SatoshiLite) February 16, 2020
Lee’s skepticism on DeFi has been echoed by a swath of other leading industry commentators.
While there are all these critiques in response to the bZx situation, some have said that the move with WBTC was more of a feature than a bug or an attack. Some have said it was just a case of smart arbitrage.
Ethereum DeFi Growing at a Rapid Clip
While there have been a few attacks and potential vulnerabilities on DeFi protocols as aforementioned, the amount of value locked in this mostly Ethereum-based ecosystem has been on a strong rise over the past year or two.
In fact, just last week, the amount of value locked up in decentralized finance protocols surmounted $1 billion for the first time ever, exploding higher as the price of Bitcoin has recovered over the past few weeks.
The growth has mainly been seen on MakerDAO, a decentralized lending and stablecoin platform. Maker’s delegates recently agreed to raise the interest rate (reserve rate) of DAI, the protocol’s native stablecoin, which may have spurred the growth of capital in the protocol.