How does DeFi deal with high Ethereum gas fee?

MonteCarlo DEX
Nov 2, 2020 · 14 min read

Liu Jie, our CEO, believes that the high Ethereum gas fee has severely constrained the development of the MCDEX decentralized perpetual swaps. While MCDEX is actively exploring L2 rollup plans, we are also looking for other plausible public chains. In Liu Jie’s opinion, there are several essential aspects that DeFi developers need to pay attention to — speed and fee, asset size and diversity, the compatibility across the public chain and Ethereum EVM, and the cost for user migration across chains.

Zora: Welcome to today’s “Blockchain 101”. We invited Liu Jie From MCDEX to talk about what DeFi participants can do to deal with the current expensive gas fee situation. Could you please introduce yourself first?

Liu Jie: Hello everyone, I am Liu Jie, founder of MCDEX. MCDEX is a decentralized derivatives exchange — a trading platform enabling efficient and transparent trading with leverages. We all know that Uniswap works with spot trading contracts, and MCDEX develops perpetual decentralized contracts. I have always been working as an engineer, and one of my previous projects at Baidu was an open-source distributed database called Apache Doris.

I have been in the industry for about three years and started with some mining projects. About two years ago we shifted gear towards the DeFi area and started working with DeFi contracts. About two months ago we launched MCDEX V2, a decentralized perpetual contract product. Right now, we are still in the process of developing V3, and part of the rationale behind this update has to do with the high Ethereum gas fee.

MCDEX has launched a liquidity mining program that everyone can join. Also, users can trade on MCDEX with leverages. Later we will cooperate with Binance thus empowering MCDEX through BSC, stepping forward on the road of decentralized perpetual contracts.

Zora: According to my record you were focusing on mining, especially ETH then switched to GRIN in 2019. Why did you shift from mining to DEX?

Liu Jie: We weren’t the earliest ones entering the industry, and we wanted to pick something relatively easier to understand. Mining was the one to start with.

We built a mining platform called “Miner Babe”, a GPU mining machine platform that carries numerous users and mining hardware. We all know that the advantage of a GPU mining machine is its ability to switch across various algorithms to mine different coins. For example, we mine ETH most of the time, and if we found another coin of higher earnings yield, we are then able to switch to mind that particular coin.

In 2019 I promoted GRIN in China, and GRIN is also one of the so-called “ Three No” projects — no premine, no team token share, no investors.

Initially, Miner Babe was the main developer of GRIN mining kernel, and at that time we were mining GRIN as well. Now we have completely switched back to ETH because ETH has high profitability. Gas fee and profit for the miners are positively correlated.

Nowadays the profit of a GPU mining machine is more than three times the profit in the past. Specifically, the gas fee part already takes 60%-70% of miners’ profit. Even 70%-80% these days, so the profit from the two ETHs per block is no longer its main income.

So why DeFi? While we were mining, we realized that DeFi was a step-through in which the Ethereum ecosystem or the blockchain ecosystem could firm up. About two years ago we saw this opportunity and decided to march towards DeFi. At that point, MakerDAO has been in the field for a while, and the Compound project was under development period. We saw this direction and loved it, so we started planning.

We believed DeFi would be the earliest filed where blockchain would touch the ground, and now this idea has been verified.

Zora: As I surf social media these days, I’ve noticed that lots of my friends are buying SUSHI or PERAL. With these projects as a comparison, the ones with a 20%-30% annualized rate of return look too minor. I think the bubble of the current DeFi market could burst at any point. What was unexpected though, was that people kept missing the profiting projects.

The logic and asset behind operations in the DeFi field are very complicated. The 2017 ICO was legendary, but we know that the essence of investment is a zero-sum game in which some participants’ gains or losses are balanced by the losses or gains of the other participants. So, what do you think about this market we are looking at? Does it seem like everyone is making money?

Liu Jie: I don’t quite agree with the part about the zero-sum game. All finance products are a zero-sum game if we say so, but that’s not the case. For both traditional finance and DeFi, it’s a process of asset appreciation, not completely zero-sum. Well of course if everyone wants to realize their own PNL, it is then a zero-sum game. But in reality, that’s not true.

We could see that in the traditional finance world including the stock market and other financial products, the asset generally increases. The Nasdaq index has been increasing over the past year as well, so the overall asset size is growing.

For traditional finance, the inflation of assets reflects the inflation of both cultural and physical wealth. For example, the stock market reflects the situation of qualified companies. So I don’t quite concur with you on the zero-sum point of view.

Now coming back to blockchain, for instance, ETH price has increased a lot this year, reflecting the optimistic expectation for ETH itself as an asset. Now an application on Ethereum has actually made Ethereum valuable. As participants pay so much gas fee, the asset value increases, and it’s not completely zero-sum.

Zora: Ok, you’ve mentioned that Ethereum congestion caused today’s mining situation. I’ve also observed that institutional investors are still at an advantage as individual investors receive even less profit than what they pay for the gas fee.

So now it seems like as the gas fee continues to spike, only institutional investors deserve to participate in this mining game, and individual investors are only able to pick up from the secondary market. Some experts have suggested participants go from the primary market instead of the secondary market, and I would like to ask about your opinion on this? What do you think about this situation of the gas fees being higher than the profit?

Liu Jie: The gas fee is expensive is because it’s part of the Ethereum economic model. No matter how much asset is carried by a certain trade, it costs gas as long as you run codes on Ethereum. This has nothing to do with the amount of money because the gas fee stays the same.

Indeed, from this perspective, it is unfair for participants with less fund. But there are programs that solve the problem. You must have heard about those aggregate mining programs in which multiple people’s funds are put together so that each individual spare much less gas fee.

This is the current situation, well of course it is caused by the congestion of the public chain itself. This gives other chains like BSC a great chance because the basic infrastructure now is almost unusable.

A metaphor I use a lot is the internet back in 1998 when we had to use a modem to go on the internet. Many websites have already been running but since the underlying network was so slow, it was hard to actually get on them. This is exactly what’s happening right now.

People ask about the problem that the aggregator will take your funds and runoff. Well, the aggregation is under a smart contract. So, if the smart contract is audited and free from bugs,

your asset is locked in the smart contract that no one can take away. It’s not like an entrust aggregation (You give the money to the entrusted operator), to which running-off would cause a problem. For a smart contract aggregation, it’s much safer.

Zora: All these DeFi products are super popular right now, but comments say that they aren’t quite a user friendly due to the high truncation fee. Taking MCDEX into account, is there a solution to this problem?

Liu Jie: The MCDEX team is as well worried about this. Our current product is a decentralized perpetual contract, which is pretty sensitive to transaction fees because of the leverage. When we designed this version, the Ethereum gas price was only 8, and now it’s 500. Lots of our earlier assumptions are thus invalid. The operators can’t really use this product because the gas fee itself is too much.

We have been working on solutions for the gas fee situation. Simply speaking, there are two possible plans. One is the so-called “rollup”, to pack multiple trades into one then go on the chain and pay the gas fee once. However, greater demands will be put on the developers if we go with this plan. Moreover, so far there is no mature rollup plan on the Ethereum platform. It might take a couple of months.

Now go on the next possible plan. As developers, we stay relatively neutral. So we will explore other public chains as well. We will be looking for the ones that are easy for migration and development. For some programs, it is hard to develop again. For instance, the workload to develop products on certain chains is double or triple the workload we had for Ethereum. In this case, we wouldn’t take these chains as our priority.

There are three qualities that we will focus on if we were to choose other chains: First of all, high performance and low gas fee. Low cost for migrating our original setup and contracts. Last but not least, the diversity of the asset on this chain. We will be looking for a place that has enough resources for users to play with.

So my answer is — rollup and stay on Ethereum, and shift to another chain.

Zora: Could you please give a further introduction to MCDEX?

Liu Jie: MCDEX is a decentralized derivatives exchange — a trading platform enabling efficient and transparent trading with leverages. It is the abbreviation of Monte Carlo Decentralized Exchange. The major product of MCDEX is Perpetual swaps. We have other financial products as well, including our V1 product which has a spread option structure. V2 has enabled perpetual swaps. Later we will develop more derivatives with creative contract structures.

Perpetual swaps are our major product with the introduction of on-chain AMM and off-chain order book hybrid model. Providing liquidity on our AMM can join the liquidity mining program.

We have a non-custodial fund product built on top of the perpetual swaps, called MCfund. Many users don’t have the ability and technique to trade the perpetual contract like they don’t know when to sell short and when to buy long. So we bring a reliable quantitative strategy onto the chain. Through MCfund, users will be able to invest in the underlying perpetual assets, and it will automatically trade. We will also bring in experienced traders to do social trading and copy trading to make orders with their trading strategy and method. Then users can automatically follow up. All these will take place on the chain in the form of DeFi.

Some asset management APPs are actually super risky as they might take all your principle. Investments made in products like MCfund are free from this type of risk because your funds are locked in the smart contract. risk management of the chain limits MCfund’s max withdrawal. If the max withdrawal point is reached, the system will automatically stop trading. Both programmatic strategy and strategy led by experienced traders have this function, so your loss is under control.

In addition, we are also building structuralized products. Some users seek stable earning, like products with a 20% annualized rate of return, but they have low expectations for risk. On the other hand, other users want products with high return, like an annualized rate of return at 200%, 300%, or even more. For liquidity mining, people are no longer sensitive to this number, an annualized rate of return at several thousand percent would sound just “legit”.

Without liquidity mining, we know that a 20%-30% annualized rate of return is actually pretty good. A 50% annualized rate of return would already exceed Warren Buffett. This product has a prioritizing structure, and the hierarchal structure widely used in traditional financial products will also be part of MCfund.

This is the product we are developing. Participating in this product not only gives you a 20% or even several hundred return rate (under different levels of risk) but also join the liquidity mining and receive MCDEX token — MCB. So here we are killing two birds with one stone. We expect to launch MCfund in Q4,

Another project under development is the V3 of MCDEX. V3 will incorporate all the user feedback and interpretations of the market and liquidity. We are looking forward to launching the V3 within 6 months.

We are also running numerous tests and hoping to have setups across various chains. As developers, we stay neutral, just like a good App should be able to run on both Android and IOS.

Again, there are certain aspects of the chain that we need to examine. Is the chain developer-friendly? Are there diverse assets on the chain? Are there enough users? Are the ecosystems complete and functional? Speed is of course a significant aspect to take into account. This is also the current situation of MCDEX. At least for right now Ethereum L1is not applicable for us. We are actively looking for solutions.

Zora: Thank you. People describe DeFi as Legos because there are all kinds of possibilities of composability. Even centralized exchanges can hedge with DEX. Is there any aggregation application based on the exchange? What’s your future plan for the development of the contracts?

Liu Jie: Hedging is for sure doable. Hedging is one of the user scenarios for our perpetual swaps, and some of our users have already been using our product for hedging.

Mutual interaction across contracts is essential for DeFi. Today the mutual interaction is mainly applied in projects like YFI combining with Curve. In fact, in the future, we will see more possibilities of composability, like interacting with other contracts to form all kinds of functions.

I would like to be clear about the fact that these are beautiful prospects. These ideas are confined by the current chain because the available gas for a single transaction on Ethereum has an upper limit, and this limit is quite small. Furthermore, when the codes get complicated, the gas fee will spike as well. Therefore, if the chain infrastructure doesn’t get improved, huge obstacles will remain for DeFi developers.

Zora: People say that DEX may replace CEX in the future. Why did you choose the decentralized derivative track?

Liu Jie: The reason why I chose the derivative track is very simple — this market is bigger than the spot market. Both the traditional financial market and crypto have proved this. Due to the leverage added on derivatives, the malleability is super strong, it has a much bigger market than spot.

Zora: What kind of DEX are you think highly of?

Liu Jie: I for sure like MCDEX. For DEX, there are a couple of important points I would like to touch upon. First of all, I think DEX needs to be permissionless. On Uniswap, anyone can add trading pairs. This permissionless characteristic of the platform gives rise to an explosive opportunity of its ecosystem. Hence, I think permissionless is significant for DEX.

Secondly, AMM is also an important element of DEX. It’s like crowdfunding for liquidity, allowing multiple people to add liquidity. Back in traditional exchange, market making is a hardcore technique with less than 1% of the trader population have this ability.

Today, the crowdfunded liquidity brought by AMM lets more participants in the game, which I think is key. However, AMM does have a high slippage problem, which in my opinion is also caused by the incomplete infrastructure. A more advanced algorithm with lower slippage is not yet applicable on the chain.

Zora: What is the difference between Order Book and AMM? Can AMM truly solve the liquidity problem?

Liu Jie: Even today, AMM and Order Book are controversial topics. I personally prefer AMM. MCDEX has both, but I can share my own opinion.

Order Book is something mature. Due to the chain speed, if all DEX place order with Order Book, the cost will be unrealistic. SRM’s DEX puts the Order Book on the chain, and BSC’s DEX is on the chain as well, so on or off the chain is not the main difference. I think there are these following distinctions.

First of all, where does the market-making fund come from? Order Book is custodial. The Order Book market maker holds the fund provider’s money and uses it to make markets. The fund provider will get a share from this market.

AMM is mostly non-custodial. Anyone can provide funds to AMM. This action is permissionless and trustless. This is the difference in terms of the source of the fund. One is crowdfunding, the other one is private equity.

Secondly, how diverse are the strategies? From the trader’s perspective, traditional traders would prefer Order Book because they already have great trading strategies. High frequency, low frequency…no matter what it is, it’s easy to use these strategies on Order Book. If these strategies are made public, they will be less effective. So the privacy of Order Book provides traders a comfort zone to continue making money with strategies they’re familiar with.

But AMM brought the benchmark higher. A good AMM could replace traditional market makers. I’ve talked to many market makers, and they think it is impossible to design an excellent AMM. There are quite a few algorithms, but they aren’t handy due to the infrastructural circumstance.

I believe that as infrastructure develops, AMM will flourish and lead to a brighter prospect. The MCDEX team is also developing a new AMM. If we have a faster chain, we will be able to design better AMMs.

Working with AMM designing expert Tarun, the team is designing many fancy AMM strategies. We hope to share our product asap.

Zora: What is the survival value of governance coin?

Liu Jie: MCDEX has a governance coin. Two years ago, people thought governance is worthless. I’m going to quote the founder of Compound here, “Governance coin is limitless.” It is the power to revise and upgrade the contract. Compound doesn’t do dividends or do it through the spread, but in fact, it can decide when to distribute dividends through governing. It is a possibility. It represents unlimited power and possibility, which is priceless. But it’s hard to evaluate and price a governance coin.

Zora: Personally, I think the core spirit of DeFi is open finance. CZ said that the most important function of blockchain is to create a free flow of value. Binance’s open finance has proved this spirit as well. The expansion of DeFi market will for sure meet the traditional finance market. When will DeFi influence traditional finance? What would be the impact that DeFi has on the traditional finance market?

Liu Jie: The older Defi projects are attempting to do so. MakerDAO had a proposal to make real estate a collateral. This proposal did not pass, but it is clearly aiming to merge DeFi with traditional finance. Bring traditional assets onto the chain, future stocks could be on the chain… in such way, the boundary would be blurred. Putting assets on the chain is the core. So if this is dealt with, I think the meeting of the two markets will come naturally.

Zora: We have a question from the audience — “Now that DeFi fund comes in, will its crash affect the mainstream coins?”

Liu Jie: I don’t think there is a good answer to this question. I don’t quite understand how people define “mainstream”. Is BTC mainstream? Is Compound mainstream? DeFi doesn’t stand for “the weird ones”, they are all somewhat “mainstream”.

Maybe people haven’t been following DeFi for long. DeFi projects like Compound or AAVE lend (especially lend) has a long history. To me, it is a mainstream coin. Even with some market callbacks, these coins with value capture wouldn’t crash.

Zora: I agree with you. In the blockchain community, the projects that have a better consensus and build stronger communities will for sure become mainstream. We have another question from the audience — “The real price of link is 0.3 usdt?”

Liu Jie: I can’t really answer this question. We have an in-depth partnership with the Chainlink team. You can tell that we use Chainlink a lot in our product. For contract trades, the oracle is an important component. I think the Chainlink team is really reliable as a partner, but I can’t price LINK token. I can only say that it is a great team that did lots of valuable things.

An interview with “ Blockchain 101”


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