Decentralized DeFi Finance is both a benefit and a problem for Ethereum

David Kemp

Decentralized Finance is an important area of application of the Ethereum blockchain, they will threaten the security of the network after the POS consensus is used. It was pointed out by Hasib Qureshi, an investor in Dragonfly Capital.

These conclusions are based on research by Tarun Chitra, who is the founder of the Gauntlet, an analytical platform. The paper notes that the DeFi protocols function against the security mechanism of the network built on the basis of the PoS confirmation protocol.

Why do we need decentralized finance?

An important area of DeFi is lending secured by digital assets. In 2019 alone, Compound, MakerDAO, and dYdX provided loans of more than $ 600 million.

The PoS algorithm assumes that cryptocurrency owners take part in managing the network through betting, for which they are rewarded. As the number of users who do this increases, the security and decentralization of the network increases.

According to Qureshi, the difficulty lies in the fact that the money blocked in De-Fi lending does not take part in staking and creating security. The subsequent development of the decentralized Finance industry and the transition of assets will lead to the fact that the Ethereum 2.0 network will become vulnerable and weakened due to the use of the PoS consensus.

This will be facilitated by a gradual reduction in the stake reward rate, which will make DeFi applications more attractive. An attacker can create artificial incentives for the outflow of funds that protect the network. As a result, higher bids will be offered.

Qureshi said that for a successful attack on a blockchain network that uses the PoS algorithm, you need to own a third of all assets that participate in betting. He believes that it is important to offer competitive remuneration rates, which will prevent possible difficulties with the security of Ethereum 2.0.

Investor Dragonfly Capital emphasized, "In order for the PoS Protocol to always be secure, it is necessary to implement an adaptive monetary policy."

Decentralized Finance DeFi and how it works

On December 4, Zerion announced that it had managed to attract $ 2 million in investments. The money was invested by organizations such as the Gnosis, the Blockchain Ventures and Ventures Placeholder.

Zerion is a service for investing and managing decentralized DeFi Finance. Users can use analogs of classic financial products, including derivatives and loans. Transactions take place without the participation of intermediaries, including processing organizations and banks. The parties cooperate directly.

Decentralized DeFi Finance is a trend in 2019. Jeff Coughlin, who is a Forbes correspondent, called this trend "a new dynamic that has revitalized the crypto currency industry."

Two months ago, Vitalik Buterin reported on the powerful development of the DeFi industry. At the same time, the CEO of the crypto exchange, Brian Armstrong, said that the development of the decentralized Finance industry is happening exponentially. Last month, Compound company was able to receive an investment of $ 25 million. during the first round. The largest contributor was the Andreessen Horowitz Foundation.

Venture deals and statements by blockchain industry opinion leaders report that the young DeFi industry is becoming more and more popular.

Key features of DeFi

Decentralized finance is a digital asset that operates on the basis of blockchain technology. it works like many cryptocurrencies. DeFi services use tokens that are derived cryptographic assets in their work. These are digital accounting units that are issued on the basis of functioning blockchain platforms similar to Ethereum. In the article "What is Ethereum", read about the features of the top-2 cryptocurrency by capitalization.

DeFi are tokens that perform the functions of classic financial assets. For example, these are DAI assets based on the decentralized Maker platform. DAI prices on the crypto exchange are around 1 dollar, this token is called "dollar stablecoin".

Experts name 5 properties of decentralized Finance:

  • Software assets. They must have the properties of standard decentralized network tokens.
  • Reliability and transparency. Owners of the DeFi asset can be found and verified via blockchain. The decentralized Finance service should not store users ' money in large decentralized wallets of trading platforms. Wallets, including Coinbase Wallet and Trust Wallet, and smart contracts participate in operations.
  • Resistance to censorship. The storage, transfer, and exchange of crypto assets should not be restricted to a narrow group of players who are responsible for maintaining the network.
  • The pseudonymity. Decentralized Finance applications must use Web 3.0 standards for transaction verification and identification. This means that users only use a personal access key that serves to sign transactions and confirms the ownership of crypto assets. No additional identity checks are required.
  • The lack of resolution. Clients can produce, trade and possess the assets of decentralized Finance without the approval of the regulator.

The popularity of decentralized Finance is constantly growing. They have many advantages, although they pose certain risks, including those that threaten digital money. The PoS consensus confirmation technology assumes that cryptocurrency owners are involved in managing the network using staking. If you will be able to use decentralized Finance, be sure to use it. This way you can evaluate all the advantages of this tool.