[ad_1]
The booming world of decentralized finance (DeFi) has reached new heights in recent weeks as the total value of assets locked in the DeFi ecosystem exceeds $ 13 billion. Arguably the fastest growing sector in the cryptocurrency industry today, DeFi has seen an explosive flow of capital and market participants within a matter of months. Amidst this soaring increase, Ethereum continues to dominate the DeFi space, holding 96% of the total transaction volume.
While this recent growth has accelerated the pace of innovation and experimentation in the DeFi landscape, it has also brought forward valid concerns about its long-term sustainability, particularly Ethereum’s scalability challenges and high gas tariffs. There is no denying that flaws exist in the world of Ethereum-based DeFi, with detractors citing excessive complexity and risk as significant obstacles. From re-entrancy attacks on Uniswap and Lendf.me to Yam Finance’s smart contract coding flaws, the high-profile security incidents in the first half of 2020 alone are indicative that the industry’s explosive growth could come at the expense of its safety and stability.
Amrit Kumar is the president, chief scientific officer and co-founder of Zilliqa, the first public blockchain platform built on sharded architecture.
At the same time, the consolidation of DeFi protocols around the Ethereum platform has raised some persistent existential questions: Beyond technical challenges such as network congestion or security issues, should DeFi be defined solely by a single network?
It’s a question made more acute by leading infrastructure provider Ethereum Infura shutting down the entire network on Wednesday.
Real world value, real world risks
With over 100 projects and applications in the ecosystem ranging from decentralized exchanges to lending and insurance platforms, DeFi has the potential to unlock a parallel financial system by making money, payments, and other financial services universally accessible. However, we as an industry would do well to remember that trial and error only extends so far when it comes to digital assets with real value.
For DeFi to see a sustainable future, developers must behave with security at the forefront of everything they do, ensuring that existing infrastructure and security measures will be able to keep up with the industry’s dizzying growth rate. In addition, the industry must start communicating risks for what they are to prevent new users from finding life savings that disappear into the digital abyss.
By adapting the approach of traditional financial institutions, DeFi projects should invest a lot of time to perform rigorous security checks and code reviews. In addition to implementing bug bounty programs to detect vulnerabilities before they result in user losses, projects should also be much more transparent about their network vulnerabilities by posting open post mortems to the public so that other applications in the ecosystem can learn from accidents and prevent them from happening in the future. This kind of transparency would be helpful in building trust among users and charting a safer path to traditional adoption.
See also: Edan Yago – Forget Ethereum, DeFi is built on Bitcoin
The incidents involving Yam Finance, bZx and SushiSwap this summer highlighted the serious inadequacies of the existing smart contract infrastructures, which have led to security breaches related to human error.
Since the infamous DAO attack of 2016, Ethereum’s Solidity has shown some degree of vulnerability. In the case of the DAO hack, the attackers exploited the “fallback function” in the target smart contract to create an execution loop that calls the “withdraw” function of the victim’s smart contract until the victim’s smart contract balance is zero or the transaction gas is exhausted. Soundness is just a centralized point of failure in smart contract design, which developers have to contend with.
As the development of smart contracts is still a relatively new field, security vulnerabilities and trade-offs can be expected as part of the growing problems of any emerging technology. For this reason, it is vital that smart contract developers keep track of new security developments and stay up to date with industry best practices.
Implementing measures such as testnet, bug bounty, or a phased rollout plan allows developers to mitigate risks and detect bugs before a full production release. Furthermore, smart contract developers who are building on Ethereum need to be aware of the idiosyncrasies of EVM and circumvent them accordingly.
Developments in diversification
As DeFi seeks to cement a sustainable future, the industry must also look to a future beyond Ethereum.
After all, the ongoing argument in favor of interoperability shouldn’t just apply to blockchain as a whole, but must equally extend to the industry’s most prominent use case: DeFi. Within the traditional financial system, most payment infrastructures are interoperable, which means that cardholders can make payments anywhere in the world, regardless of local currency.
On the other hand, today’s blockchains exist in silos and are not yet able to communicate with each other and exchange value. Without establishing cross-chain interoperability, the DeFi movement will remain in the shadow of traditional finance. To solve this problem, the DeFi development community has come up with several ways to provide new forms of interoperability, from atomic swaps and wrapped tokens to cross-chain communication platforms.
See also: Matt Luongo – Why hard-nosed bitcoiners can learn to love DeFi
While solving these issues is critical to the progress of DeFi as a whole, the industry also needs to take a more collaborative approach in building a more diverse ecosystem of DeFi-centric applications across different platforms, rather than sticking to one network.
Outside of Ethereum, other smart contract protocols are also developing their respective DeFi ecosystems. Such alternative projects are set to play a pivotal role in the DeFi field, potentially opening a new chapter in its development. Ethereum could have the first mover advantage as a pioneering smart contract platform with the largest number of token holders, but further experimentation and diversification is needed to encourage innovation and greater technical optimization over time.
We have already begun to see significant developments in the DeFi landscape with the growth of new financial products from savings, payments and loans. With the obvious appeal of the industry, not only for emerging economies but also for companies excluded from traditional finance in developed economies, DeFi has great potential in democratizing access to a new financial model in this digital age.
But for the industry to step out of the shadow of traditional finance, DeFi must first overcome its existential challenges and growing difficulties in order to thrive and deliver on its promise as a sustainable alternative to traditional finance.
