People are arguing about whether or not DeFi is bad for proof-of-stake systems

It all started with a post from Haseeb Qureshi, an investor at Dragonfly Capital, titled ‘How DeFi cannibalizes PoS security.’ Qureshi wrote a piece implying that the more Ether gets locked in DeFi, the less people there will be to stake, resulting in a weaker proof-of-stake system.

Since posted, the article has received harsh criticism from people like Vlad Zamfir and founder of EthHub, Eric Conner.

The “unqualified” opinions that Zamfir was referring to comes from Tarun Chitra, CEO of the Gauntlet Network, who Qureshi cited in his article. Gauntlet is a “simulation platform” that increases security of smart contract protocols. They work with projects like Compound, so they don’t seem to have much of incentive to degrade opinion on DeFi.

Qureshi’s Dragonfly Capital is even deeper in to DeFi, being invested in Compound, dYdX, Oasis Labs, Cosmos and more, all built within Ethereum. Certainly an investment group with money thrown around the DeFi ecosystem wouldn’t want to hurt returns in any way.

Zamfir doesn’t deny the potential issues, but says that they have been discussed before and brushes it off as a non-issue. Eric Conner on the other hand offers an in detail perspective on the argument.

“It’s claimed the attacker can gather this ETH by paying high rates on Compound. Besides major jumps in logic around liquidity of the defi market and sourcing of collateral, let’s just assume the attacker is able to borrow all this ETH and find $1.5bn in collateral.” – @econoar

He goes on to break down the math behind why it would be unlikely for an attacker to take over 5,000,000 Eth, but the basis of the argument is that it would be very difficult. Others have mentioned that economic incentives aren’t the only reason to claim stake, and there will presumably be a large group of people who are staked for the sole purpose of keeping Ethereum secure.
Brendan Foster, Co-founder of Dharma gave some insight to how Compound might deal with proof-of-stake, a widely used lending platform that he works closely with.
“I’d bet that Compound will integrate staking in ETH2, just like they have DSR for unutilized Dai. So lending in high-yield DeFi won’t be mutually exclusive with staking” – @brendan_dharma
As usual, people don’t really know what will happen in crypto as most operations are one big experiment. It’s hard to name a crypto project that hasn’t gone through a very traumatic experience at some point. Let us know in the comments if you think DeFi will ruin Ethereum’s upcoming proof-of-stake mechanisms.

Proof of Stake: When Ethereum’s price will start to matter

Ethereum has distinguished itself as one of the few coins that isn’t concerned about “mooning” to maintain relevancy. But just how long can Ethereum remain secure without significant gains in price? The answer to that question depends upon If proof of stake comes to fruition.

Security in Proof of Stake vs. Proof of Work 

In a proof of work system, it takes tons of electricity to validate a block. Validation is the confirmation of all transactions within a new block and those that came before it. This is how security works in tokens like Bitcoin and Ethereum, and because of how difficult it is, it works pretty well.

Instead of difficulty lying in the cost of mining operation, a proof of stake system interprets difficulty as obtaining large amounts of the currency. For example, if Ethereum ever moves to proof of stake, Eth holders will lock their assets up in exchange for a chance at validating a block. The more Eth that someone locks up, the higher chance they have of validating a block and receiving rewards.

As stated earlier, the Ethereum community has a reputation of not placing importance on the price, but in a proof of stake system, that notion will need to be thrown out of the window.

“If we build a network worth one dollar, then, to attack it someone doesn’t need to spend very much money. The more it costs to purchase enough Ether to meaningfully disrupt the system, the more secure it is for everybody building on top of this.” – Ameen Soleimani, Founder of Moloch DAO

How has Ethereum been preforming lately? 

2019 was owned by Bitcoin. Everyone called Bitcoin’s 2017 bull run a “bubble” and investors seemed to want to prove that there is still life left in grandfather crypto.

Unfortunately, it has not so much been the case with Ethereum.

Bitcoin’s all time high is $20,000 and this year it almost recaptured those heights, hitting $14,000 before bears took control. Ethereum on the other had has seen all time highs of $1,400 and only made it back up to $350. In these terms, Ethereum was more overvalued than Bitcoin at their 2017 peaks.

Still, Ethereum’s lows were in the $90 range this year and with a $350 top, it’s pump was just shy of 4x, not too far away from Bitcoin’s gains.

After the highs of this year, Ethereum dropped much more quickly than Bitcoin, falling over 2x from its peak while Bitcoin is still maintaining more than half of its yearly high value. Crypto markets tend to move in tandem, but in order for outperform Bitcoin, it will need a rally on its own.

Will Ethereum be secure if Proof of Stake releases at the current price?

Ethereum is still worth billions of dollars as is, so changing to a proof of stake network won’t kill it. But still, it is objectively for an organization to come up with billions of dollars than to set up a mining rig bigger than everyone else’s combined.

If an organization wanted to accumulate Eth, it would be purchasing from potential stakers, where as mining equipment comes from manufacturers. This allows room for greater gains in power than in a proof of work system.

At the end of the day, the best thing for the security of Ethereum as a proof of stake system would be for more people to adopt the tech and the price to increase. As the price increases, it becomes harder for an organization to acquire a majority. As more transact with Eth, the price becomes higher.

Ethereum’s ERC-20 transaction ‘flippening’ is now behind us… thanks to USDT

According to a report from Coin Metrics, the ever-impending Ethereum flippening has finally happened this month. The term once used to describe a coin — in many cases suspected to be Ethereum itself — overtaking Bitcoin in market capitalization, this “flippening” rather refers to ERC-20 tokens now making up more transactions on the Ethereum network than ETH itself.

Read moreEthereum’s ERC-20 transaction ‘flippening’ is now behind us… thanks to USDT

Is DeFi making an impact outside of crypto?

Decentralized finance (DeFi) has been making it’s rounds in the blockchain mainstream lately, especially with the tentative release of Mutli-Collateral Dai. The term comes out of everyone’s mouth, but opinions are polarized. Some are under the impression that DeFi is impactful enough to trigger a bull run and some think it’s just useless.

To get a better perspective about if the DeFi talk is making an impact outside blockchain communities, I took a look at Google trends.

 

DeFi google trends

 

To my surprise, the term DeFi isn’t even close to it’s all time high. Even more surprising was that it’s all time high was in 2010. This isn’t the first time that the crypto space has been excited about something that previous generations had already talked about. Web 3.0 is a good example of an idea that had gone through a cycle and was refreshed through blockchain.

The difference is, decentralized finance hasn’t really gone through another phase. When researching the term DeFi from posts in 2010, most of it is just edgy internet slang for defy. The most viewed “defi” YouTube video in 2010 was a wind surfing event.

This video currently has 144,000 views, which got me wondering what the total amount of views from blockchain related DeFi videos amount to. This got me wondering whether all the DeFi videos on YouTube add up to this one wind surfing event.

It turns out that there are very few videos on YouTube with over 20,000 views that either have DeFi or decentralized finance in the title. In comparison, there are multiple videos with over one million views that have Ethereum in the title. The biggest Bitcoin YouTube video has over ten million views.

MakerDAO’s Dai stablecoin is a popular and key ingredient to the DeFi ecosystem, and the most popular video on that topic has around 22,000 views.

It’s easy to see how investors can get excited about blockchain tech that has tangible use cases. The fact that it is more profitable (and still non-volatile) to save USDC in Dharma than saving USD can transcend crypto. But in real time, DeFi’s macro impact is still up in the air.

Multi-Collateral Dai will still mostly be backed by Ethereum at launch

Rune Christensen clarified during a DeFi Nation conference call that he expects Ethereum to be the primary backer of Dai even after the Multi-Collateral iteration is released.

“I totally expect that in the beginning it will just be Eth primarily that will be used” – Rune Christiansen

He added that releasing MCD at this time is mostly so that Maker can start figuring out what happens when they have multiple collateral types.

Tokens included in Multi-Collateral Dai aren’t widely used

The initial tokens that can be collateralized for Dai in addition to Ethereum and Augur’s REP, Basic Attention Token, and 0x. While these are widely known within the crypto space, the are all around under the top 25 in terms of market cap.

It’s no surprise that Christensen expects that Ethereum will be the dominant collateral as it still holds a spot as the second highest market cap coin.

Since all three are Ethereum based tokens, they should allow for easy integration into Maker’s network. That could be one reason for the choices along with not having a significant amount of users, or room to drop in price could allow for easy testing.

Maker still likes Ethereum

“Eth is a very good asset that can carry DeFi very far.”

Christensen showed optimism in Ethereum in the immediate sense, but also recognized that DeFi shouldn’t be the only thing that grows the Ethereum network. He compared DeFi pushing Ethereum as the cart pushing the horse. Dai is supposed to pull the stability out of Ethereum rather than push its price.

Still, transactions are Ethereum’s life blood, and adding more collateral means more transactions. Christensen even played with the idea of backing Dai with real world assets, and mentioned how that could push the price of Ethereum.

At the end of the day, Maker wants to push it’s product to as many people as possible and believes that if DeFi continues to scale, it can’t be backed by only Ethereum.