Roundtable Discussion on Prosperity and Opportunities, Technologies and Mechanisms That Shape The Future of DeFi
Last week, Anthurine, CMO of QuarkChain, joined a roundtable discussion that was organized by Guowei Finance. Here is the summary.
Q1: When any new thing is born, it would undergo different stages from birth, to budding, to emerging, to prospering, and finally to becoming a common utility. DeFi is one of the examples. Currently, more and more users are participating in DeFi loans and more entrepreneurs are joining the DeFi industry with over 1000 projects. Can you share with us what your expectations are for this industry regarding its future growth and scale, given its skyrocketing scale, high growth, and lockup volume?
A1: The previous guests had already given us a great overview on the latest developments in DeFi. While we should not omit a number of problems that it presents recently, especially regarding financial assets, DeFi on the whole presents itself as a more open and more convenient financial application with great future potential. The problems that are present now will not shake the foundation of DeFi development but to expose some problems early on and make DeFi even stronger.
DeFi has several advantages: firstly, it can lower the costs by replacing some tasks done by the central node and rebate these saved costs to other participants.
Secondly, it offers a high level of transparency. Currently financial institutions are highly specialized to a degree that even Warren Buffett did not understand the prospectus of the subprime mortgages. The contracts behind DeFi products are open, which is a stark contrast to traditional financial products that are wrapped around in layers.
Thirdly, DeFi bears a high level of openness and convenience. Centralized institutions require high levels of regulations that are of high costs. In Comparison, DeFi opens for everyone to participate.
However, there are still some problems with DeFi. Currently, because of some problems with ease of operations and cost of learning, its user base is not scaling enough and cannot rely on the law of large numbers like traditional finance does to guarantee its security. As a result, security depends entirely on the code of projects and such dynamics has exposed several problems. For instance, the oracle manipulation attack several weeks ago or the more recent ERC777 contract loophole attack, these attacks prompted many DeFi to employ some centralized methods to guarantee security.
The above reasons lead to only a small circle of people using DeFi and yet to evangelize.
As for expectations regarding the future, I see a possibility where existing DeFi will combine with traditional finance, also known as cefi, to enhance the transparency of the network and improve efficiency by using DeFi to lower the cost of DeFi. On the other hand, cefi will bring in the user scale and a wide suite of products and thus provide better services for more people, enabling DeFi to become an open finance.
Going back to the present, with the negative interest rate in the backdrop, traditional finance is coming to blockchain for better yields. If we can seize the opportunity to marry defi and cefi well, then the combined effect will increase the existing scale of DeFi dramatically. It can be ten-fold or hundred-fold; it’s difficult to estimate.
Q2: Currently, there are some noticeable trends in the space, one is regarding users and the other regarding industry. After we see some attacks occured recently, we also discovered the 7-day lockup amount has increased significantly. Such discovery is an intriguing one and what are your thoughts on that? Does this trend show that DeFi has obtained the basic trust of the user and is enjoying the scale of its user base to participate in the market?
Recently, the lockup amount has increased yet the number of participating accounts did not grow at a corresponding rate. The two pieces of statistics point to the fact that scaled participation has not taken place yet. Another clear mark is that ETH is not congested recently. So I think we are a few miles away from reaching the scaling effect.
It also means that, rather than more people are participating, this phenomenon is taking place as the existing liquidity is staked into contracts. The increase in assets confirms the trust towards DeFi and the optimism asset holders have regarding the DeFi development. Even though DeFi has been a hot topic for the past few months, compared to the community of cryptocurrencies, DeFi remains a much smaller circle since its application is difficult to use with security concerns. The phenomenon of huge increase in lock-up amount can be attributed to the promotion of DeFi on media outlets which brings in new users who discover the functions and values of DeFi. However, whether these users and capital will stay for the long time will remain in question.
Macroeconomic reasons also played a huge role in the increase in lock-up. There are limited ideas in the secondary markets to make a profit with negative yield in the traditional financial market. Even the US crude oil dropped below zero for the first time in history! To hedge against risks in traditional markets, more capital flew into DeFi.
Q3: It would suffice to say that DeFi is really ‘hot’ now and attracts eyeballs from many. Currently, most of the DeFi products and platforms are running on existing public chains like Maker running top of the Ethereum platform and EOS REX on top of EOS. Among all the ecosystem use cases, DeFi is the application that has the highest volume. So what are some of the things necessary from public chains to provide in order to promote and support DeFi platform development? From a public chain system standpoint, what kind of improvement and enhancement are necessary in DeFi systems in terms of technologies and mechanisms?
Currently, DeFi applications are running on top of the Ethereum platform. Because of the design of Ethereum, these DeFi applications bear a few problems:
- Slow operations. Network speed is slow and project developments is slow as the date for ETH2.0 to go live remains unknown
- Smart contract tokens cannot directly deploy smart contracts and require additional developments. Every time one would require to have transaction fees using ETH, which lowers the composability and ease of use for DeFi.
- Security issues
QuarkChain has strategic approaches targeting DeFi. Since its inception, QuarkChain aims to design the next generation of DeFi network with these goals: higher security, lower transactions, high usability, and more convenience. The QuarkChain team develops its own infrastructure layer using the heterogeneous sharding framework. The framework solves all the existing problems faced by Ethereum and provides plenty of functionalities to make DeFi easier to use.
Let me give you a quick overview of what heterogenous sharding is before we further delve into the approach in DeFi of QuarkChain.
Bitcoin, anonymous tokens like ZCash and Grin, ETH, EOS, and all the pubic chains are all considered under the bigger umbrella of blockchain technology.The essence of blockchain technology comes from the arrangement and combination of the following four components：
- Consensus (POW, POS, DPOS, PBFT),
- Transaction model (BTC transaction model, different virtual machine, privacy transaction model),
- Ledger model (UTXO, Account model), and
- Token economics.
At present,for many public chains, the four elements are fixed. Once a consensus, a transaction mode, an ledger model and a token economics are selected, they can no longer be changed, which limits the flexibility and adaptability of the whole blockchain system.
QuarkChain is the first public chain that implemented heterogenous sharding technology. Heterogenous sharding treats each shard as one chain and each chain can configure the four components we mentioned based on its needs. Such design allows new technologies to be incorporated into a chain and such chains can be embedded into the overall system design easily. So different chains can host different consensus mechanisms, token economics, and ledger models.
Through implementing the proprietary Boson consensus, the bottom layer is highly flexible and supports cross shard transactions and contract deployment. Different DeFi contracts can be deployed on different shards to realize different effects. As such, the DeFi functionalities of QuarkChain has the following advantages:
- High usability of its services: through multi-chain/shard design, the entire network can horizontally expand based on the demand of users’ throughput. The maximum throughput capacity of the entire network, after third-party verification, can reach million TPS or above. Moreover, when there appears popular applications, the application will only affect the shard chain that the application is located with no effects on the other shards, which greatly enhances the usability of the network.
- Low transaction fees: The high throughput of QuarkChain also brings about another great advantage which is to significantly lower users’ transaction fees. We expect to lower the fees by tenfold, if not more. The advantages of low transaction fees can help realize more DeFi scenarios that were previously impossible on the Ethereum platform due to fee concerns, such as multi-asset combinations, multi-contract deployment, or high frequency operations.
- Multinative assets: Native token refers to tokens that are directly issued by the blockchain infrastructure for maintaining normal operations. These tokens are used for realizing equity and for implementing fixed functions of the blockchain systems. Prime examples are Bitcoin, Ethereum, and QKC. On the basis of application protocols, tokens that are built on top of existing blockchain systems and are used for deploying smart contracts are known as smart contract tokens. It is widely adopted on the dApps of different public chains, of which ERC20 protocol is the most famous.99% of the tokens issued on public chains are smart contract tokens. Compared to native tokens, smart contract tokens are like second-class citizens which have many limitations, one of which is its inability to pay for transaction fees. QuarkChain allows developers and users to issue native assets to directly pay for transaction fees and participate in DeFi activities with no needs to purchase QKC. In addition, from the developers’ standpoint, they only need to maintain one set of code to support many DeFi contracts that support different multinative assets, which makes the development process more efficient.
- Composability of cross-chain DeFi: While there are multiple shards running, there will be challenges as to how to use cross-chain protocol to realize users’ participation of DeFi activities across different chains. This is also known as the problem of composability. In fact, the founder of Ethereum Vitalik penned a post where he delineates how the future ETH2.0 will realize the composability of cross-chain DeFi: https://ethresear.ch/t/cross-shard-defi-composability/6268 In fact, QuarkChain already implemented Vitalik’s vision, through multinative assets, users can seamlessly participate on the DeFi activities of all shards anytime.