Week in Review | #44 | 2020
This week was full of ups and downs. The price of Bitcoin continues to go up and is now over $13,000, which inspires confidence in the community. Traditional players are getting more active in the space, and FOMO looks to have reappeared.
However, amidst the jubilation threats persist. Algorithmic holes in DeFi projects continue to be an issue. As the sector continues to expand and become more interconnected this may become a bigger concern for the industry as a whole.
March of the traditional industry players
It looks like last week’s PayPal news was only the beginning of traditional players and institutional investors getting more serious about crypto. Toyota System looks to be experimenting with a digital token concept, while the JPM Coin looks to be getting some first commercial use.
It remains to be seen whether or not JP Morgan is able to leverage its standing in traditional finance to grow its blockchain industry footprint, but the development is a sign of interest, and it wouldn’t be surprising to see other banks follow.
To that end, DBS Bank is scoping out a potential digital exchange launch. It will be important to watch whether institutional capital that gets onboarded through these types of solutions makes its way into the broader crypto economy. If institutional clients are walled off from the DeFi sector, the impact of their entry may be limited.
However, the release of KyberPRO signals the fact that DeFi projects understand the importance of attracting institutional capital. If DeFi solutions can gain the confidence of some traditional players, it could result in a major boost to the ecosystem.
Stablecoins continue their march
In the stablecoins segment, we are also starting to see the emergence of traditional financial players. For instance, the Central Bank of the Bahamas has launched the “Sand Dollar”. CBDC has been one of the most popular topics in social media. With custodial-backed coins competing against decentralized algorithmic ones, it will be interesting to see if CBDC shifts the balance of power in the sector.
Additionally, the basket-backed stablecoin concept appears to be getting some interest in the community. DefiDollar raised $1.2M for its DUSD product. The idea appears to be to reduce the risk of each individual stablecoin by creating an aggregate more stable entity. The question is, given the interconnectedness of the space, if one of the major stablecoins fails, will the rest be able to survive that?
Problems with the harvest
Harvest was one of the hottest DeFi projects last week, and then it suddenly wasn’t. The protocol became a victim of an exploit that cost it around $24M. This is not the first project to suffer from an algorithmic vulnerability.
At the moment, these events are labeled as hacks. However, it is worth considering if that is what they actually are. If the user does not try to circumvent any security parameters and uses the tools with their intended purpose, why is that a hack?
When centralized institutions mismanage risk, like in the case of Bank of England in 1992 or JP Morgan in 2012, the investors and funds that profit off of that don’t get labeled as hackers. So, why is it that in the case of a decentralized application the blame gets shifted to the opposing trader?
There should be a clear differentiation between an attack, and traders profiting off of poorly designed algorithms. The blame for poorly designed algorithms should rest with the protocol stewards and not the market.
Governance as the achilles heel
The tremendous growth of the DeFi sector over the past month has been catalyzed in no small part by governance token mining. As DeFi projects move towards a decentralized format it would seem that project ownership passes to the community. Recently, one of the biggest DeFi projects, Aave, announced that admin keys will be handed over to the community (governance smart contracts).
Still, while decentralized governance might sound great on paper, when it is improperly implemented it can leave the protocol vulnerable. The paper, “Decentralized governance in DeFi: Examples and pitfalls” co-written by DappRadar and Monday Capital details the imperfection in some of the popular DeFi protocols and the potential vulnerabilities that arise from them.
The incident with BProtocol using a flashloan to vote on MakerDAO is an example of a potentially serious vulnerability. As has been demonstrated, an entity can hijack a vote using a flashloan. This is potentially even more dangerous than the 51% attack executed by loaning computing power.
Flashloans have been at the center of a lot of exploits, and it will be interesting to see if and how the DeFi community adjusts to address their downside.
Ethereum keeps on building
While challenges remain, Ethereum’s ecosystem continues to grow by building. Based on the audit of Teku by Quantstamp, Ethereum 2.0 looks to be a little bit closer.
Furthermore, the Ethereum Hackathon, ETHOnline is coming to a close, and there is a lot to digest there. There are over 270 projects, and that once again highlights the strength of the Ethereum community. Challengers continue to emerge, but Ethereum’s community has started to develop network efforts, which may be tough to overcome.
Games and collectibles continue their march forward
Axie Infinity, one of the leading gaming projects in the Ethereum ecosystem has announced the sale of $2.97M worth of its governance token AXS, through the Binance Launchpad. Having hosted the token sale of The Sandbox, Binance looks to be seriously looking at the gamings and collectibles sector.
While many centralized players in crypto are focused on catching up in DeFi, Binance appears to show a more balanced approach.
Adding to the excitement, there are rumors of a new in-game currency from Fortnite. It is unclear what this currency will be, but if the popular game launches its own cryptocurrency it could mean an important step for the widespread adoption of crypto assets.
Also, the defi-gaming crossover project MegaCryptoPolis finally launched its $MEGA token. Besides incorporating DeFi concepts into its universe the project is interesting in that it operates on both Ethereum and Tron. It will be important to see if more game developers choose to adopt this strategy.
NB: The information provided here is for reference and informational purposes only. This is not investment advice and should not be treated as such.