Founder of imToken: Thinking about the opportunities and challenges of DeFi development from the perspective of wallets

On October 26, Ben, the founder of imToken, shared "The Ultimate State of DeFi from the Wallet Perspective" at the 7th Old Friends Reunion event hosted by IOSG. Although a month has passed, the content shared is not outdated, especially in the current market conditions.

Ben He, Founder of imToken

We have compiled the transcript, and the following is the original text of the speech (with minor adjustments):

Hello, everyone. I am Ben, the founder of imToken. Today I am very honored to participate in the DeFi Summit held by IOSG in Shanghai remotely. The epidemic does limit our opportunities to participate in offline events, but we can still stay connected online. There are many DeFi projects from the East and the West here today, and I hope to communicate and learn with you.

The topic I will share with you today is the ultimate state of DeFi from the perspective of the wallet .

I believe everyone is already very familiar with imToken. We were founded in 2016 and focus on decentralized digital wallets. We hope to create a safe, reliable, simple and easy-to-use digital asset management tool that can help more ordinary users manage their digital assets and allow everyone to experience the new products and services brought by the new technology of blockchain.

In more than four years, the blockchain industry has developed by leaps and bounds. In particular, Ethereum, which started in 2016 with the vision of a world computer, has Turing-complete smart contracts on top of this world computer. As a killer weapon to attract immigrants to the new world of blockchain, Ethereum has successfully attracted a large number of talents to participate in the construction of the ecosystem.

In the past four years, we have seen the emergence of token standards such as ERC20. In 2017, we also saw 1C0 bring great stimulation to the industry. This method also gave many project parties financial support, enabling them to promote the development of blockchain infrastructure. Then in 2018, the ERC721 NFT non-fungible token standard also received some practice, such as CryptoKitties, including the current ENS, which are presented in the form of NFT. From 2019 to now, we have also seen that the entire DeFi blockchain finance built on smart contracts and open finance have made great progress, and the entire ecosystem is in a prosperous scene, which is also the main topic we are going to discuss today.

The evolution of these blockchain technologies is inseparable from the people who participate in the joint construction of the ecosystem, which we call builders, including developers, researchers, mechanism designers, etc. Blockchain allows us to participate in the network in an open source and open way from all aspects, which is also the charm of blockchain. It is a completely open network that anyone can participate in the construction. Its entire open source and open spirit can allow more developers to iterate and improve on the achievements of their predecessors. Similarly, the community governance mechanism that is very popular in blockchain at present can gather group wisdom and continuously break through innovation. From this perspective, blockchain is truly using technology to promote changes in the world .

This is a panoramic view of the Ethereum ecosystem compiled by IOSG Ventures. We can see that there are now hundreds of projects and teams building these application protocols and products in different fields. It is precisely because of these strong developer communities that blockchain can continue to move forward.

From another perspective: users. I believe that "users" should be the motivation for developers to create innovations, and should also be the ultimate goal of creating results. Because we need to use technology to create products and serve users, so that more people can enjoy the benefits brought by new technologies and change their lives.

Three major challenges in the development of DeFi from the perspective of wallets

From the perspective of wallets, we can more directly see the fit or generation gap between products and users. So today I will take a look at the current development status of blockchain and the challenges faced by the recently booming DeFi from the perspective of wallet users. Of course, the most important thing here is what we call product user experience, which is an important condition for whether blockchain technology can be mainstreamed.

Challenge 1: Private Key

The private key itself is a very technical concept, so it is very difficult for ordinary users to digest and understand the principle and function of the private key. If they cannot understand it well, it will be difficult to really keep the private key safely.

However, as a decentralized wallet, imToken has always been very persistent in promoting education so that users can gradually understand private keys and a series of safeguards for controlling private keys. However, this is not just a purely technical issue, it is a trade-off between technology, security, and product experience.

From an industry perspective, we see that there are different types of private key solutions. For example, centralized exchanges help users manage their private keys in a fully custodial manner, which means that the user's assets are entrusted to a third party for safekeeping. This approach still has a series of potential black swan events or risks, so we are more willing to actively promote non-custodial methods, that is, to let users control their own digital assets.

In the Ethereum ecosystem, we have seen some very interesting attempts, such as smart contract wallets that decouple accounts and private keys, and then present accounts on Ethereum smart contracts, allowing users to manage their own digital assets, including being able to set a series of control permissions, and then hide the private key in the entire software end, so that users are unaware. When he really loses the account, there are also co-managers or guardians who can help users regain control of the account.

Sharding technologies such as TSS (Threshold Private Key) are also being experimented and implemented. This technology is currently mainly being tried out by some large institutions. As a multi-signature co-management method, TSS is a more secure digital asset management solution, but in terms of user experience, it still needs to evolve continuously.

Challenge 2: Mining Fees

The entire DeFi has brought a large number of users with liquidity mining, driving up the mining fee. We have seen that the mining fee has risen from a few dozen gwei to hundreds or thousands, resulting in a transaction costing tens of dollars to be on the chain, which is a huge burden for users. Not only is the cost high, but there are other intuitive feelings at the user level, such as the slow transaction packaging, especially after a long wait, if the transaction still fails, it will also lead to a waste of mining fee costs.

The core of this problem lies in the throughput of the entire Ethereum network, which is a question of scalability. In terms of solutions, miners have taken some actions in the short term, increasing the original GasLimit throughput of 10 million to 13 million, but it is also a drop in the bucket and cannot be of much help. Ethereum 2.0 is essentially also to solve the problem of scalability, and Eth2 is still in the process of being implemented. The relatively medium-term solution is the community's Layer 2, which hopes to migrate some applications and services to the Ethereum Layer 2 network to relieve the pressure on Ethereum Layer 1.

In addition to the mining fee cost, the mining fee itself is actually a big threshold. For new users, it is actually difficult to move forward without ETH, because any action on the chain requires the consumption of ETH to pay the mining fee.

So at this stage, there are also a series of solutions to this problem. For example, Meta-Transaction and GasStationNetwork use payment mechanisms to allow users to pay mining fees through a third party without ETH. Correspondingly, users need to pay their own other tokens. In addition, new standards such as Gasless Token have emerged, allowing users to sign and authorize in off-chain wallets, and let the third-party (relayer) network help users transfer tokens.

In this regard, imToken has also proposed a solution in stages: the Miner Fee Gas Station , hoping to help our users solve this threshold problem. Through the Miner Fee Gas Station on the imToken "Browse" page, even if users do not have ETH, they can use this function to quickly exchange their other tokens for ETH for subsequent on-chain transactions.

Challenge 3: Complexity

We know that DeFi mainly implements financial engineering on the chain through smart contracts, which is a very powerful advantage brought by smart contracts. As an open and permissionless protocol network, DeFi allows anyone to use its services, and any project party can also integrate these protocols in a combined way to create new products. We call this form Money Lego.

The tokens in the Ethereum network are a very good economic incentive mechanism that can help projects to start cold and attract early liquidity or users. However, the infinite weaving and combining of these protocols will inevitably bring about the problem of complexity.

For example, users pledge ETH to the Maker protocol to issue the stablecoin Dai through overcollateralization, and then deposit Dai into the Compound lending protocol to earn interest. At this time, Compound will return cDai (deposit certificate) to the user, and the user can also put cDai in applications such as PoolTogether (lossless lottery). Then PoolTogether will also return a token called poolDai to the user.

From here, we can see that the user's ETH is converted into Dai, then cDai, and finally poolDai, involving four tokens, and then a combination of three network protocols, so such a combination of protocols will bring greater systemic risks. Moreover, such a combination may trigger some attack vectors that are not easily discovered by security audits, amplifying the risks of the entire system. The robustness of this system has also become a barrel effect, and the weakest protocol may determine the overall security level.

Interested students can learn more about Yearn, which is also a typical complex system composed of layers of intertwined protocols. Participating in it is like walking into a maze.

I think such complexity is daunting for ordinary users, because they may not know where their assets are at the end of the game, and may forget what kind of authorization they have made in which protocol, and what kind of risks it will bring to them in the future. So if DeFi is in such a state, we can imagine that it can only serve a small number of professional practitioners.

The final state of DeFi

Given the three major challenges mentioned above, in which direction will DeFi evolve and what will its final state be?

First of all, we still need to solve the problem of scalability. Because the load and expansion capacity of the overall network determine the economic volume it can carry in the future, as well as the scale of users it can carry in the future. We have seen that the current business carrying capacity of Ethereum has reached its limit, and many businesses have been passively squeezed out in the competition for resources, or actively switched to other networks. Therefore, Ethereum has planned the 2.0 plan very early, hoping to solve the scalability problem of Ethereum Layer 1 through the solution of sharding expansion. Regarding this aspect, the Ethereum Foundation is currently actively promoting it.

For the community, we have recently seen a lot of Layer 2 solutions, such as ZK-Rollup, OP-Rollup, Plasma, etc., which are actively promoting expansion solutions. Some projects have reached the milestone of mainnet, but are still in a state of technical verification. More ecological applications and users need to migrate to Layer 2.

However, from the perspective of user-oriented wallets, we feel that the overall development path, whether it is Layer 1 or Layer 2, is in a very fragmented state. We just talked about Layer 2, which has different solution paths, but we don’t know what technical path will eventually be implemented, so the entire network in the future should be a state where various solutions coexist. For a user-oriented infrastructure such as a wallet, I think it will definitely form such a network aggregation layer at the wallet application layer .

We call this layer the Omni layer . At this layer we hope to solve the series of problems mentioned earlier. We hope it can resolve the issues of user accounts and private keys , especially the issue of account separation between different networks and chains. At the same time, we also hope to resolve the private key challenge problem on the Omni layer, and help users solve the cost issues when using the network, the efficiency issues of interacting with the network , and the complexity issues when participating in network activities .

Only when this series of problems are alleviated or resolved can we hope to enable a wider range of more mainstream ordinary users to actively embrace this new technology and use the new applications and services brought by blockchain.

So regarding the final state, we can see that Layer 1 may mainly ensure the security of the underlying assets, including the status and finality of the entire data on the chain, and then solve the scalability problem in Layer 2, so that the low-cost, high-efficiency network can meet the daily use needs of the general public.

We believe that most of the complex DeFi protocols are not suitable for ordinary users, regardless of whether they are deployed on Layer 1 or Layer 2. For ordinary users, they may just need to hold tokens. In other words, the financial engineering of DeFi may only present a token to ordinary users. This token is the abstraction and objectification of the service, and it is also the best way to express it to users.

Token

As the smallest economic unit, tokens can help the entire DeFi avoid a series of problems in the face of complexity crises.

For example, in the prediction market, it can also issue some prediction tokens. Recently, Gnosis issued two tokens for the US election, one called yes trump and the other called no trump. So if you want to guess the result of the US election, you can participate by purchasing tokens. This is what we mean by users can participate in the financial activities of the network through tokens.

For users, this minimalist approach corresponds to only two states: yes or no. The "yes" state means that the user holds tokens and has the right to participate in various services and applications in the DeFi protocol, or transfer the tokens for exchange, either in exchange for another token or in exchange for a product or service.

So in summary, what we hope to see is that users can indirectly participate in DeFi by holding tokens on the Omni layer. In this model, its native assets are very safely kept on Layer 2. DeFi protocols or service providers issue them in the form of warp tokens on Layer 2, allowing users to hold them very easily. At the same time, these wrap tokens can also be circulated in the Layer 2 network very efficiently and at low cost.

What I want to share with you today is mainly some of our speculations about the future development of DeFi and blockchain during our work at imToken. Let’s wait and see.

Finally, we also hope that all participants in the blockchain ecosystem will work together to create and meet these challenges together. That’s all for today’s sharing. Thank you.