Limitations of Current DeFi Infrastructure: Way Beyond Yield Farming
DeFi requires an evolution and maturation before it reaches its true, exciting mission. One of the primary reasons why DeFi (Decentralized Finance for short) has become such a hot topic, is its decentralized ethos. Using unique blockchain technology, DeFI has the power to put all the means of the finance industry away from centralized institutions, and into the hands of the people.
As DeFi evolves, Governance token structures, collateral pool risks and meltdown protection will be critical to its long-term success.
Last month, Ethereum Summit panelists discussed the growth, governance, and risks of DeFi, including a new high-interest reward scheme taking crypto by storm. As Decrypt outlines, we should be cautious of the ‘rule of whales’.
An Ethereal Sessions panel of DeFi insiders discussed the potential for yield farming to be a key catalyst for growth.
Panelists said that as competition grows, however, successful high-yield strategies will become more complicated and risky.
Experiments abound as a new financial paradigm begins to take shape.
Yield farming, the hot new high-interest reward scheme that’s taken the cryptoworld by storm, stands to be an essential part of the early growth of decentralized finance (DeFi). Still, it remains highly experimental and serious risks lurk behind the memes and promises of high returns, including the danger of DeFi protocols being taken over by crypto “whales.”
Those were just a few of the takeaways from the most recent Yield Farming and Bootstrapping Liquidity Ethereal Summit, where leaders from some of the most notable projects in DeFi, such as Balancer, Aave, and Instadapp, discussed the latest crypto trend and the governance experiments it’s meant to facilitate.
Yield farming emerged as a response to distributions of DeFi protocol governance tokens that began earlier this year. The practice consists of locking digital assets in different protocols, such as Compound or Balancer, in order to generate rewards (yield) in the form of governance token or ETH payouts. Yield farming initially became popular as a result of generating high returns, in some cases in excess of 100% on invested capital on an annualized basis.
Most panelists agreed, seeing the practice as a way for different platforms to attract new users. Honeylemon.market’s Tina Zhen pointed out that yield farmers, or more specifically governance token holders, play a role in providing core functionality of the protocol, provisioning scarce resources (liquidity) essential to DeFi networks while also taking positions on changes and improvements to individual platforms.
Zhen noted that a potential stumbling block for decentralized finance comes from limits on attention — as protocols with decentralized governance systems proliferate, it becomes increasingly difficult and time consuming to keep up with ongoing proposals or changes.
Since the value of DeFi protocol tokens is still based on exchange value rather than value linked to the actual volume of loans being created or token swaps being facilitated, yield-farming operations that are simple and profitable today could soon become unwieldy and fail to break even as different governance tokens fluctuate in price. In other words, making money using yield farming is highly dependent on governance tokens remaining at high valuations, which is not at all guaranteed.
Since the value of DeFi protocol tokens is still based on exchange value rather than value linked to the actual volume of loans being created or token swaps being facilitated, yield-farming operations that are simple and profitable today could soon become unwieldy and fail to break even as different governance tokens fluctuate in price. In other words, making money using yield farming is highly dependent on governance tokens remaining at high valuations, which is not at all guaranteed.
The Rule of Whales
Instadapp co-founder and CTO Samyak Jain also commented on the question of how much governance is appropriate to distribute, highlighting the risk of what Akropolis founder and CEO Ana Andranova dubbed the “rule of the whales” — meaning control of DeFi platforms with ostensibly ‘distributed governance’ actually resting in the hands of just a few wealthy users.
Jain described a scenario where a company or protocol distributed more than 50% of the governance to users, while also allowing that governance token to be lent and borrowed on the protocol itself, or on a competing service. Should more than 50% of governance tokens become available to be borrowed, bad actors with deep pockets could temporarily gain control of enough tokens to benefit themselves in a way that hurts average users or the protocol as a whole.
“Simple, one-token-one-vote governance models don’t work and they inevitably lead to kleptocracy,” Andranova said. “If we stick to simplistic governance models, it’s going to be VCs and whales dominating, which defeats the purpose of the whole exercise.”
While yield farming offers the prospect of juicy returns, the panel agreed: DeFi protocols are still maturing, and while the potential upside is massive, they have a lot of growing up still to do.
Why Axis is Different:
Axis is different. Protection mechanisms will be built-on chain. Our governance token structure will consider the risks outlined above. It all starts with our technical architecture and two important components: the DACP (Decentralized Adaptive Counter Party Pool) and the DRM (Decentralized Risk Monitor).
DACP (Decentralized Adaptive Counter Party Pool) is a critical component around the native
DeFi protocol. The DACP acts as the “central counterparty” for all traders to buy or sell from. The
fund pool raised by liquidity provider’s staking. For every DEMS order execution, DACP provide account
service include fund checking, margin confirm, adaptive rate updating to final asset clearing.
DRM (Decentralized Risk Monitor) is the risk control center inside the axis system. It updates the margin rate for all market participants including DACP, LP and all traders. DRM also has a built-in mechanism which will hang up the Axis system for a certain period (15mins) when DACP_AR below some level (100%), market meltdown.
Axis: Opening Finance For All
The Axis team will be offering more deeper insights and a closer look into the underlying technology and how these will truly revolutionize the DeFi space. Axis the first dedicated DeFi chain, and will help catalyze the Decentralized Finance revolution by upgrading and incentivizing those who believe in its values and missions of truly open finance.
