The Yam Protocol Will Migrate Old Tokens To An Audited Contract

The saga continues…

After the original Yam Finance protocol collapsed due to a single line of code, its developers are planning to relaunch the project on new, audited smart contracts.

In a blog post published on Friday, the developers outlined a migration plan that will see the already existing tokens get transferred on a new smart contract with a properly functioning rebase.

The relaunch was announced shortly after it became clear that a last-ditch effort to save the protocol failed on Thursday.

Now, details on the upcoming transition have emerged. The migration will happen in two stages, and includes an initial Yam V2 contract that will store information on previous balances. Users will need to burn their V1 tokens and mint new tokens before an unspecified deadline. This transition contract will not be taking rebases into account, so the amount minted will depend on the underlying share of total supply of the tokens.

The transition contract will not have governance features, but will instead use off-chain signature-based voting to let the community express its desired path forward.

The most likely path is the deployment of fully audited V3 contracts, which will be the actual relaunch of Yam. No timelines were given on this yet, though the team said that specific information on audits will be provided in the coming days.

Once the contracts are deployed, the team will “strongly advocate” for rewarding all token holders who “acted to save the system.” It will be up to the community, however, to decide if the plan is worth pursuing and submit the appropriate governance proposal.

This could result in an interesting political conundrum for the nascent community, depending on what percentage of holders delegated their tokens to save the protocol. If they are a majority, they could force the decision through at the expense of the non-participating holders. If they are a minority, this decision would require altruism from the remaining holders.

Updated: 8-15-2020

Record Ethereum Network Use And Gas Fees Pose Risk To DeFi Expansion

How DeFi Goes Mainstream In 2020: Focus On Usability (#GotBitcoin?)

Ethereum network use and transaction fees are rising to record highs, will this interfere with DeFi’s current expansion?

The number of Ethereum network transactions more than doubled in 2020 and is now virtually identical to the January 2018 all-time high.

As shown on the chart below, the number of transactions doubled in the past six months to stand at 1.23 million per day.

This situation might seem very bullish at first, but one must remember both EOS and Tron (TRX) started as ERC-20 tokens before launching their own mainnet and running fully independent blockchains.

A similar chain migration is happening on Tether’s USDT, a stablecoin which recently secured a $12 billion market capitalization.

Tether was created under the OMNI protocol, which runs on the Bitcoin network and most of the USDT tokens were moved to the Ethereum network to avoid increasing Bitcoin (BTC) transaction fees.

Ethereum 7-Day Average Transaction Fee

As Ethereum fees rose throughout 2019, a similar movement happened over the past year, as some Tether (USDT) holders opted for the Tron network.

This occurred while median Ethereum transaction fees increased threefold to $0.14 in July 2019, although this seems insignificant compared to the current $3.

The Tron network currently holds half the amount of USDT under ERC-20 and it will likely increase its share, considering the recent Ethereum network fees.

For comparison, USD Tether was dominated by Omni in August 2019, while Tron represented less than 3% of its market capitalization.

It is worth highlighting that USDT is currently circulating in EOS, Liquid, Algorand, and Bitcoin Cash SLP networks, although on a much smaller scale.

Can Ethereum-Based Networks Survive Surging Transaction Fees?

To better gauge the odds of additional outflow from the Ethereum ecosystem, one should analyze what kind of transactions are taking place. Stablecoins, for example, have fewer incentives to withhold during periods of network constraint.

On the other hand, switching networks on DeFi applications such as Maker (MKR) and Compound (COMP) seem less obvious.

Competing smart contract platforms have their disadvantages, and a much smaller ecosystem, as reported by Cointelegraph.

Etherscan data shows growing use by Decentralized Finance (DeFi) applications on the Ethereum network, but how sustainable are those numbers considering the current fee levels?

Data from DefiPulse shows that the total value locked in DeFi grew an impressive five-fold over the past 90 days. While this is astounding, exactly how many of these Ethereum transactions are related to this figure?

According to Etherscan data, (YFI) averaged daily 3,400 transactions in the past week with 15,700 token transfers.

Considering its $5,175 price over that period, each transfer was worth $23,900 on average, meaning a $3 fee increase should not be an impediment.

To ascertain whether YFI is an outlier, one should analyze Synthetix Network Token (SNX), another DeFi contender among the top 20 most active Ethereum contracts.

As per the above chart, SNX averaged daily 2,800 transactions past week with 8.3 million token transfers. Considering its $4.70 price over that period, each transfer was worth $13,900 on average. This is yet another indication that no exaggerated impact was caused by increasing Ethereum network fees.

What About Oracles?

Chainlink (LINK) is the largest token aiming to provide oracle solutions, and despite being interoperable on multiple chains, it’s indeed an Ethereum ERC-20 token.

Its increasing usage seems to be behind an impressive 88% surge over two weeks, as reported by Cointelegraph.

LINK averaged 35,000 daily transactions in the past week and 34 million token transfers. Considering its $13.40 price over that period, each transfer was worth $13,000 on average.

This analysis is another positive indicator that despite the recent Ethereum network increasing fees, some major oracle and DeFi applications will be able to withstand it, at least momentarily.

Not Every Smart Contract Can Thrive With The Current Fee Level

The Ethereum network’s rising fees have been accelerating second layer solutions development on some DeFi applications.

Although the overall impact for Ethereum might be positive, as it might prevent the migration of applications to competing networks, it certainly does not paint a good picture for investors and the general public.

Ethereum 2.0 development is under immense pressure to deliver a network which is better able to address the rapidly growing demand from stablecoins, oracles, decentralized exchanges, and DeFi.

The most important question to ask now is will the current Ether (ETH) holders and the network developers adapt to the current constraints?

The answer to this might depend on what competing cryptocurrency networks can offer, so in addition to tracking Ether price, wise investors should also monitor the network’s activity closely.

Updated: 8-15-2020

Decentralized Exchanges Maturing, But High Demand Reveals Limitations

The growth of decentralized exchanges in 2020 has been phenomenal, but there is a hard ceiling with current technology.

Decentralized exchanges, also known as DEXs, have risen significantly in popularity since the start of 2020, with both their user bases and volumes growing at an accelerating pace. The sector is currently being driven by so-called “automated market makers,” or AMMs.

In a nutshell, these exchanges do away with the traditional order book and custom price orders. Instead, an asset’s price is determined by a mathematical formula that depends on the relative share of the assets in liquidity pools.

When a user transacts, this changes the balance of assets in the pools and results in the price moving slightly higher or lower. This mechanism lets AMMs follow the price movements of the market.

Bancor was the first live implementation of an AMM, though many others such as Uniswap, Balancer, Mooniswap and Curve later built similar systems. Yield farming and the subsequent decentralized finance boom has helped propel daily volumes to more than $400 million.

Matthew Finestone, head of business development at layer-two decentralized exchange Loopring, told Cointelegraph that AMMs “have product market fit,” a term applied to startups that are finding traction. But the current iteration of DEXs has a variety of issues that could severely limit the size of that market.

On-Chain Performance And Target Market

Ethereum-based DEXs are currently some of the largest gas guzzlers on the blockchain, contributing to gas prices rising to more than 250 gwei, while in quiet periods they can be as low as 2 gwei.

The skyrocketing gas prices suggest that the current volume levels are close to the maximum of what existing DEXs can achieve without completely barring average users.

The growth of AMMs was already a direct result of the relative slowness of Ethereum, as Finestone said: “[AMMs] found ways to effectively ’solve’ the fact that market makers cannot be placing quick, precision orders on Ethereum.”

But while some of these issues could be solved with better on-chain scaling, Paolo Ardoino chief technology officer at crypto exchange Bitfinex, told Cointelegraph that on-chain settlement could never compete with centralized matching engines:

“The current solution for decentralized exchanges, even if Ethereum grows and becomes Ethereum 2.0 and the transaction speed becomes, let’s say 10,000 transactions per second, will still be many orders of magnitude slower than one single centralized exchange.”

Explaining why, Ardoino added that the issue with on-chain settlement “is just the speed of light.” When nodes across the globe have to agree on a single block, no networking improvement can beat the performance given by, for example, co-locating trading infrastructure in the exchange’s data centers. These performance limitations could be a serious hindrance to professional traders, especially high-frequency trading companies.

Dan Matuszewski, co-founder of trading firm CMS Holdings, recounted his experience of using DEXs on Twitter: “First off the experience sucks, in no way will you convince me it doesn’t suck, I won’t have it.” Elaborating on the point, he said that DEXs are expensive and the terms of a transaction are not clear until after it settles.

“I could be paying 5% bid offer [spread] and have little idea,” he added, though he noted that in the current environment, it’s “not that big a deal.” The relatively slow speed of execution, on the other hand, was not a major issue for him.

Nevertheless, Matuszewski told Cointelegraph that DEXs are not currently suitable for professional traders. “It’s for small ticket hobby traders to punt around on,” he said.

A further issue is front-running. Due to the completely transparent nature of the blockchain, a class of front-running bots exists to place favorable trades in the window between the submission of a transaction and its inclusion in a block. While they are generally used for arbitrage, this approach may also be used to take advantage of upcoming market moves.

A November 2019 study published in Cryptoeconomic Systems analyzed the effectiveness of Uniswap as a price oracle.

While the conclusion was largely positive, the researchers relied on the presence of arbitrage agents who would be motivated by profit to bring its price in-line with the rest of the market. Mikhail Melnik, a developer at DEX aggregator 1inch, told Cointelegraph: “Current AMMs will definitely be ineffective without arbitrageurs, because arbitrage is being used as a price discovery mechanism.”

Thus, the most popular DEXs today cannot be useful without the presence of markets based on order books, which currently are largely centralized. Furthermore, the arbitrage mechanism results in the issue of impermanent loss, which siphons a significant portion of the profits away from liquidity providers.

Potential Fixes

Some of the issues in AMM exchanges can be resolved without fundamental alterations. Solutions to fix impermanent loss are currently deployed by Bancor V2 and Mooniswap, the DEX developed by 1inch. Both attempt to limit arbitrageurs’ profits, with the former using price oracles and the latter a virtual balance that smoothens price changes over a five-minute period. According to 1inch, its solution has the added benefit of making front-running essentially impossible.

In terms of performance, Uniswap’s founder, Hayden Adams, sees the launch of smart-contract-enabled Optimistic Rollups on the Ethereum network as a way to improve throughput. The layer-two solution would create a generalized environment where Solidity smart contracts are executed outside of the blockchain. Uniswap could then be deployed in this environment with minimal changes to the code.

However, some have noted that Optimistic Rollups could worsen the front-running issue by only letting the operators see the transactions in advance. This would fundamentally defeat the goal of minimizing the need to trust operators, which is the core prerogative of generalized layer-two solutions.

There are currently few solutions to address the usability issues outlined by Matuszewski, though it’s possible that higher liquidity and specialized tools could help make these exchanges less expensive and more deterministic. Nevertheless, the lack of true price discovery is likely to remain. Melnik offered a potential solution:

“It is possible that some AMM designs that use oracles for these [price discovery] purposes will appear, but in my opinion, using oracles […] significantly worsens the problems with front-running.”

However, this would not remove the reliance on traditional exchange mechanisms.

Noncustody As The Next Iteration

According to Ardoino, “The solution is always in hybrids.” In his view, the future of decentralized exchanges will feature full on-chain custody and clearing — the act of updating the accounts of two parties following a trade. But the settlement, or the actual order matching, will not be done on-chain, he added:

“You can have open-source matching engines that are not on-chain but are running on a thousand different nodes and they have their own small books, and aggregated they can represent a bigger book.”

Such an approach would maintain on-chain custody and keep off-chain — yet peer-to-peer — matching engines, solving the performance issues without losing out on the decentralization. “This is the type of resiliency where we need to be headed rather than trying to create everything on a single blockchain,” Ardoino concluded. Though the matching engines are not peer-to-peer, such solutions are already being deployed by platforms such as Loopring and DeversiFi.

Loopring relies on zkRollups, a layer-two technology where the computational workload is offloaded to an operator that has to submit zero-knowledge proofs that state its changes are valid. In Loopring’s specific solution, the data is submitted to the mainnet in compressed batches. Finestone claimed that this makes it “a centralized exchange that simply cannot do anything evil or mishandle user funds.”

However, this puts some limitations on the performance of the exchange, as according to Finestone, Loopring can process 2,100 trades per second. While that is much higher than on-chain DEXs, it is still well below the performance of a fully centralized exchange.

DeversiFi has higher performance at 9,000 transactions, but it stores the data off-chain in a “Data Availability Committee.” Both exchanges are noncustodial, though in DeversiFi’s case, users would need to rely on the committee instead of blockchain data to retrieve their funds.

Anton Bukov, chief technology officer of 1inch, pointed to similar solutions such as zkSync to combat latency and lack of performance. All layer-two systems are still largely in their infancy, and it’s likely that throughput could be improved in the future.

The matching engine is not a bottleneck in this case, as Finestone revealed that Loopring uses conventional cloud computing providers such as Amazon Web Services and Google Cloud Platform. Some proposed DEXs such as Serum and Vega are still implementing on-chain matching, but they use higher-performance blockchains.

Can Decentralized Exchanges Become The Standard?

Given the fundamental price discovery limitation of AMMs, they cannot become the primary trading venues for cryptocurrencies. On-chain settlement is currently a major bottleneck, but even massive scaling improvements are unlikely to be enough for all traders.

Noncustodial but centrally operated exchanges fix many of the issues with existing DEXs, but for now, they appear to fall short of the performance levels required to replace their centralized counterparts. They also could, theoretically, front-run their users, which is similar to centralized venues in that regard, as Finestone noted.

Compared with Optimistic Rollups, however, the operators are usually the exchanges themselves, which incentivizes them to not engage in foul play.

Finestone also believes that centralized exchanges will always remain useful, “mainly [for] those that desire ’legacy-style’ convenience of asset ownership, as well as wherever fiat is heavily interacted with.” In his view, an end state for DEXs would have them process two-thirds of the overall volume. Therefore, it’s possible that different types of centralized exchanges and decentralized exchanges could fill their own separate niches as the sector evolves further.

Updated: 8-15-2020

Bitcoins Are Being Tokenized Faster Than They’re Mined As DeFi Craze Continues

Since Sunday, 1,043 more bitcoins were tokenized through Wrapped Bitcoin than were actually created by bitcoin miners as the Ethereum-based decentralized finance (DeFi) boom shows no signs of abating.

* About 900 bitcoins are mined per day, given the current issuance rate of 6.25 bitcoins minted per block and the target 10-minute block time.

* At last check, nearly 31,000 bitcoins have been tokenized on Ethereum, according to Dune Analytics, 75% of which were minted by Wrapped Bitcoin (WBTC).

* Ethereum’s supply of tokenized bitcoins hovered below 3,000 until mid May when the rate of new tokens shot up.

* The rate of bitcoin tokenization signals the surging demand to use bitcoin in the burgeoning network of Ethereum-based DeFi applications.

* “WBTC continues to exhibit strong growth as demand for bitcoin in DeFi has exploded,” said Kyle Davies, co-founder of Three Arrows Capital, in a private message with CoinDesk. “I expect this trend to continue,” he added.

* In July, Three Arrows Capital minted its tokenized bitcoins through BitGo, the company that helped spearhead Wrapped Bitcoin in 2019.

* Within a year, WBTC will be a “first class asset” in the decentralized finance ecosystem, predicted Three Arrows co-founder Su Zhu, “just as USDC and USDT are now.”

Updated: 8-16-2020

A Community-Governed DeFi Platform Makes Crowdfunding Decentralized

A community governed DeFi project sets a new standard for crowdfunding.

Mantra DAO, a community-governed Decentralized Finance (DeFi) platform with a focus on staking, lending, and governance, has announced it has finished its initial membership offering on August 16. In total, the project has raised $5.9 million.

To make the crowdfunding more decentralized and prevent large investors from having too much control of the secondary market, Mantra DAO said it signed a digital Simple Agreement for Future Tokens, or SAFT, after completing know-your-customer activities with every single retail investor.

SAFT is an investment contract offered by cryptocurrency developers, normally only to accredited investors.

However, the project tells Cointelegraph that it is trying to “raise the bar” for crypto investment and set an example for future blockchain projects to be more accountable with investors’ funds.

These investors have legal claims and protection with their investments for the first time in crypto or blockchain space. It explained that:

“Electronic signatures are valid under most jurisdictions and provide a very convenient, very transparent solution to retail investors protection. […] we issue a digital agreement via Docusign where the user inputs his wallet address and the amount contributed.”

The raised funds, according to the project, is in a licensed custodian company. The custodian company will be in charge of the fund accounting and keep track of “every single penny raised”. This will solve the dilemma of who controls the funds with the previous blockchain project, says Mantra DAO.

They concluded that these various measures are meant to put more pressure on the project itself to deliver what the project has promised on paper.

As Cointelegraph previously reported, the new Russian “crypto” law showed a regulatory regime for tokenized securities, yet had no regulation for cryptocurrencies. The SEC eased crowdfunding regulations amid the coronavirus pandemic.

Updated: 8-17-2020

Bitcoin Investors Swap For Ethereum ‘Wrapped BTC’ To Yield Farm And Chill

Demand for Wrapped Bitcoin has surged as Bitcoin investors seek a private method to gain exposure to DeFi and lend farming.

Demand for Wrapped Bitcoin (WBTC) has been growing tremendously in the last few weeks, with more than 23,100 WBTC ($274 million) currently in circulation.

According to data from FlipsideCrypto, a digital asset data provider, more than half of the WBTC was minted in the past month as the decentralized finance sector saw record growth.

Launched in 2019, WBTC is an ERC-20 token that is pegged to the price of Bitcoin (BTC). It allows users to seemingly transfer Bitcoin to the Ethereum network and interact with smart contracts.

To get WBTC, users must go to an authorized merchant who will hold the user’s BTC and exchange it for WBTC tokens. Merchants can mint and burn WBTC tokens as needed.

The growing demand for WBTC shows that Bitcoin users are looking for high-yield options to hold Bitcoin. According to a recent report by Genesis, a digital currency prime broker, institutional clients are also showing similar interest.

While there is growing interest in WBTC, its growth is also inflated by the yield farming phenomenon, as more than half of all WBTC in circulation is currently locked in DeFi lending protocol Compound.
Yield farmers value privacy

WBTC is by far the most popular Bitcoin-backed token used on the Ethereum network, but it is also a centralized option that requires users to go through a Know Your Customer procedure and to use a third-party custodian service. For some potential users, this raises privacy and censorship concerns.

While institutional interest around DeFi has been growing and even central banks are beginning to get involved, many users are individuals who may want to stay anonymous while using WBTC.

As such, the demand for renBTC, a decentralized and anonymous alternative to Wrapped Bitcoin, has been surging as well.

RenBTC is similar to wBTC but it features trustless storage for the Bitcoin being locked. This allows users to fully own their asset and remain anonymous in the process.

While not all DeFi protocols accept renBTC, this token can also be exchanged for WBTC and used to access DeFi protocols like Compound that only accept the latter.

According to Flipside Crypto, 19% of all new addresses using WBTC in August bought it through renBTC. This shows that privacy can indeed be a driving factor for more growth in the DeFi sector.

DeFi’s Potential Seems Limitless, But Can Ethereum Support The Growth?

As DeFi continues to grow, new security issues are arising. Not only have several DeFi protocols been subject to hacks and malfunctions, but the growth of yield farming itself could have consequences to the tokens involved with each platform.

For example, currently, more than 50% of all DAI is locked in Compound, which can disrupt its peg with the dollar. In the case of WBTC, more than half of its supply is locked in Compound as well. The continuance of this trend could easily bring liquidity issues for the tokens at hand.

Even more concerning is the fact that the Ethereum network is becoming increasingly bogged down by network congestion and high fees.

While it seems that the future for DeFi and all its related parts is limitless, the nascent sector requires a strong foundation to stand on.

At the moment, the cornerstone is the Ethereum network, but the question is: Can it sustain the growing number of smart contracts and demands being placed upon it?

Updated: 8-24-2020

No Collateral Required: How Aave Brought Unsecured Borrowing To DeFi

Unsecured borrowing has come to decentralized finance (DeFi).

Aave, a DeFi money market that allows users to earn interest on cryptocurrency and borrow against it, introduced credit delegation in early July. This service allows someone with a lot of collateral deposited on Aave and no desire to borrow against it to delegate their credit line to a third party they trust.

In return for essentially co-signing a loan to the trusted third party, the delegator gets a cut of the interest, juicing the return on their deposit.

The development represents a significant shift for DeFi lending, which until now has been predicated on only one of the traditional “four C’s” of credit: collateral. That’s to be expected when lending funds to complete strangers on the internet.

Credit delegation is a step toward basing loan decisions on other factors, such as the borrower’s income, savings or track record of repaying debts (“capacity,” “capital” and “character” in the old banker’s formulation).

The step change comes at a time when DeFi is all the rage. On Aug. 15, Aave alone crossed over $1 billion in crypto staked to the overall platform, as measured by DeFiPulse. At present, nearly $7 billion worth of digital assets are staked as collateral fueling this new industry. Only four projects (MakerDAO, Compound, Aave and Curve) have had over $1 billion worth of assets staked at one time.

“We are locking a lot of funds into DeFi,” Stani Kulechov, Aave’s CEO, told CoinDesk in a phone call. “We are looking at: How can we utilize that value as much as possible?”

On Aave, Kulechov said, around 75% of users aren’t using their credit lines. They are just earning interest on the deposits (and governance tokens).

While it’s natural to think in terms of person-to-person lending here, Kulechov said credit delegation is aimed more at institutional-level use cases and sophisticated, price-conscious trading outfits that need options for fast and easy credit.

These include over-the-counter desks, market makers, traditional financial institutions looking to borrow stablecoins to trade into fiat for analog-world lending or smart contracts set up to run specifically delineated strategies.

The idea is not that Aave itself becomes the lender but that users with capital earning returns on Aave increase those returns by sharing their credit lines.

To be sure, this is a well-worn road in the traditional world that expands opportunity for many but gets people (sometimes a few, sometimes a lot of them) into trouble.

“I think it’s healthy and natural to experiment around these models. But they do have a lot of risks around them, for obvious reasons, if the assets can’t be recovered in time for the primary owner,” Joseph Kelly, CEO of Unchained Capital, a company that writes loans against bitcoin collateral.

So how does credit delegation on Aave work? Here goes.

Without Collateral, What’s Backing The Loan?

Basically, relevant laws and contracts.

Aave provides access to OpenLaw contracts that allow the entity with the credit line to set up terms for their counterparty to agree to. They can turn to arbitration or the courts in the event of a default.

It’s up to the collateral holder to decide which specific requirements to make of those they delegate to. The nice feature that OpenLaw provides, though, is reflecting the contract terms directly in the smart contract that governs the relationship.

“I think the OpenLaw contract was just to show the possibilities. At the end of the day you can decide how to do it,” Kulechov said.

How Do The Deals Get Arranged?

Right now, the Aave team is doing it and so far it has only done one, for Deversifi, an exchange. “They are market-making,” Kulechov said, explaining why an exchange would need to borrow funds.

In other words, this first deal is a long way from a consumer getting an unsecured loan to cover a medical bill or buy a washing machine. It reflects the vision for the services that it will provide liquidity sources to entities that can be verified as worthwhile credit risks.

Aave has not disclosed who delegated the credit to Deversifi.

What we see today in the credit delegation is only a minimum viable product, Kulechov explained. “Now we kind of match the delegators and the borrowers,” Kulechov said. In other words it’s Aave that promotes the project to people with large deposits and then finds suitable counterparties.

This hands-on process is not scalable, however.

So Where Is It Headed?

This is where tokenomics, or in this case Aavenomics, comes in.

As Aave decentralizes, the vision is that the holders of Aave’s governance token, AAVE, would begin handling the scaling of credit delegation. Users would set up pools (vetted and approved by the AAVE holders) where they would seek out entities looking for liquidity options and assess whether they were good credit risks.

Then delegators could look at those pools and decide whether to delegate to them. It would always be up to collateral stakers whether or not they wanted to delegate their credit and whether or not the risk profile of a specific pool was attractive.

“Basically we make it more scalable so we don’t need to match these deals,” Kulechov said.

Kulechov believes DeFi could become a very attractive source of liquidity for use cases even outside of crypto.

“The idea is that this credit delegation could become a wholesale debt market. Which means if you are a facility in DeFi, CeFi, traditional finance, you could source part of your liquidity from Aave,” he said.

Meaning even online lenders that are making loans to regular people in the real world might borrow stablecoins on Aave and convert them to fiat to lend, because Kulechov believes that DeFi will be able to beat interest rates on liquidity sources they usually use, such as private placements and bonds.

This has yet to be tested, but it’s the future Aave is eyeing with credit delegation.

How Can Delegators Manage Default Risk?

Mainly by carefully vetting the borrowers they allow to use their credit lines, or “underwriting,” as bankers call it.

But for additional protection, another relevant project is Opium, which announced Saturday it had created a credit default swap (CDS) on the Aave protocol. A CDS is a contract that insures the buyer against a third party defaulting on a loan. The seller collects a premium and in return stands ready to make the buyer whole for potential losses on the loan.

In addition to risk management, CDS can be used for speculation by parties uninvolved in the loan, and these instruments are best known for their role in the 2008 financial crisis. Over the weekend Opium’s announcement elicited no shortage of snarky “what could go wrong?” reactions on crypto Twitter (which also made light of the project’s name). To be fair, some argue that CDS provide markets with an early warning signal of credit problems.

What About The Thing With Mortgages?

This is still a work in progress, but the vision is that RealT would tokenize home equity. Then AAVE holders could vote to accept those home equity tokens as collateral on Aave.

If that happens, it would mean both that people with home equity could potentially have a modest way of earning a small return on it and that they could also use it as a home equity line of credit. Obviously this could be quite dangerous, as MakerDAO users learned last year, when users took out personal loans for real-world needs only for the interest rates to spike when the system was tested for the first time.

That said, Aave has mechanisms for lending at stable interest rates. Regardless, new industries just need to take these shots, Kelly said.

“I don’t think there’s a time when it’ll be obvious that the market and technology are mature enough to try these models out,” he wrote. “There will be some that implode, either due to credit mismanagement (if centralized) or technology and market issues if decentralized.”

Kulechov made a similar point.

“I think innovation should not wait. If you have the ability to get it done, I think you should get it done. But I think always we need to be aware of the risks,” he said. “We definitely need to go slowly and securely.”

Originally known as EthLend, Aave was funded by a $17 million initial coin offering in November 2017. The team has not released a timeline for the release of version 2.

Updated: 9-10-2020

Another DeFi Exit Scam Just Made Off With $20M In Investor Funds

Is DeFI unravelling, or are these just growing pains?

The rapidly expanding DeFi space is becoming riddled with scams as another suspicious project has headed for the exits carrying speculators’ money.

“A new liquidity mining pool DeFi project, Yfdexf.Finance has exited the market after defrauding investors of $20 million in total funds locked in its protocol,” media outlet ZyCrypto wrote on Sept. 10.

The project shilled its vaporware hard via Twitter and messaging apps such as Discord over the past 48 hours, ZyCrypto detailed. Cointelegraph tried tracking down details of the effort, but all traces of the scam appear to have been deleted at press time.

The DeFi space has moved incredibly fast in 2020, especially in recent weeks, with projects such as SushiSwap seeing millions of dollars in action only days after its launch. Some such projects, however, have proven to be problematic in a variety of ways.

Updated: 9-14-2020

DeFi Platform bZX Sees New $8M Hack From One Misplaced Line Of Code

bZX made all the right moves, but it wasn’t enough.

The Fulcrum DeFi protocol developed by bZX, which had recently relaunched after a series of hacks in February forced the team to regroup, was hacked once again to the tune of about $8 million.

According to the incident disclosure by bZX, the culprit is one line of code placed at the wrong location in the contract for its “iTokens,” the token representing a user’s share in the pool of supplied assets — essentially a tokenized deposit balance.

A fix was quickly deployed to prevent further occurrences. As Anton Bukov, chief technology officer at highlighted, the fix simply moved one line of code several positions below.

The bug duplicated tokens when a user sent a transaction to themselves through a particular function. Under the hood, the contract simply subtracts the value of the transaction from the sender’s and adds it to the receiver’s. The contract created temporary variables representing the initial balances of the sender and receiver, and used those to update them.

In the case when the receiver and the sender are the same, however, the subtraction occured after the initial balance variables were set. This meant that the subtraction had no effect, so the attackers could simply create new tokens at will.

The duplicated tokens were then redeemed for their underlying collateral, with the hackers now “owning” a much higher percentage of the pool that let them drain 219,199.66 LINK, 4,502.70 Ether (ETH), 1,756,351.27 Tether (USDT), 1,412,048.48 USD Coin (USDC) and 667,988.62 Dai (DAI) — a total of $8 million in value.

The bZX team told Cointelegraph that the hacker returned the money on Monday, saying, “The attacker was tracked and identified due to their on-chain activity, he came forward shortly after this and returned the funds stolen.”

Past experience led bZX to create an insurance fund to cover for these “black swan events,” and the stolen coins were thus debited on the fund, which receives 10% of the protocol’s revenue through interest rates. Nevertheless, the Fulcrum protocol was left with just $6 million in total value locked after the incident.

Repaying that debt may thus require a significant amount of time, and is predicated on the protocol achieving success despite suffering these bugs. The bZX team made a hard commitment to secure practices with multiple audits from Certik and PeckShield, as well as a reinvigorated bug bounty program.

That appears to have been insufficient, which highlights that creating a secure DeFi protocol is harder than it may seem.

Updated: 9-16-2020

Regulatory Risks Grow For DeFi As A ‘Money Laundering Haven’

DeFi could fall under regulatory pressure if it is seen as a haven for money laundering.

The rapid growth in decentralized finance and yield farming is likely to attract greater regulatory attention according to a recent report.

A joint research paper by global management consulting firm BCG Platinion and has indicated that the rapid growth in DeFi in 2020 has created the potential for money laundering which will bring it under the radar of regulatory authorities.

Since the beginning of the year, the dollar value of crypto collateral locked across DeFi platforms has increased over 1200% to reach $9 billion according to data provider DeFi Pulse.

DeFi by design is permissionless and decentralized which means, unlike centralized exchanges, there are no KYC (know your customer) requirements for users. It operates largely beyond the realms of government and regulatory control which raises concerns about illegal access to financial services according to the report.

Commenting on the report in its newsletter, Ciphertrace noted:

“Since DeFi protocols are designed to be permissionless, anyone in any country is able to access them without any regulatory compliance. As a result, DeFi can easily become a haven for money launderers.”

DeFi protocols believe they can escape the threat of regulation by moving to full decentralization including governance, meaning regulators would be unable to shut the platforms down even if they wanted to.

However the scale and governance of DeFi protocols varies greatly in terms of full decentralization. Some protocols, such as Uniswap, have had substantial venture capital backing by highly centralized corporations, Andreessen Horowitz and Union Square Ventures in this case.

There is a fear global regulators could turn their attention to DeFi as it grows in scale. This may involve using decentralized identity and address checking services in order to blacklist certain users.

Fiat also needs to enter the ecosystem at some point, which is usually via traditional centralized exchanges which are increasingly regulated. Financial Action Task Force (FATF) regulations include the ‘Travel Rule’ which requires Virtual Asset Service Providers (VASPs) to collect and transfer customer information during transactions.

This may end up with the mass whitelisting and blacklisting of blockchain addresses associated with certain tokens, exchanges, protocols, and even users. If fiat onramps, such as centralized exchanges, are prevented from transferring crypto to DeFi-associated addresses, then DeFi protocols may be forced to adopt KYC and other regulations.

The research noted that the current FATF recommendation is that if the DeFi protocol is sufficiently decentralized and the entity behind it is not involved in daily operations, it may not be classified as Virtual Asset Service Providers (VASPs) and therefore will be immune from the Travel Rule.

But As Ciphertrace Noted:

“Judging by the current regulatory trends of greater KYC and other compliance requirements such as the FATF Travel Rule, DeFi could eventually fall under the scope of global regulators as it grows in scale.”