Opinion: DeFi should not be limited to a single Ethereum framework

The burgeoning world of decentralized finance (DeFi) has reached new heights in recent weeks, with the total value of assets locked in the DeFi ecosystem exceeding $13 billion. DeFi is arguably the fastest growing sector in the crypto industry today , having seen an explosive influx of capital and market participants in just a few months. During this rapid rise, Ethereum continues to dominate the DeFi space, accounting for 96% of total transaction volume.

While recent growth has accelerated the pace of innovation and experimentation in the DeFi space, it has also raised legitimate concerns about its long-term sustainability, particularly Ethereum’s scalability challenges and high gas fees. It’s undeniable that Ethereum-based DeFi is flawed, with critics citing DeFi’s overly complex and risky nature as major roadblocks. Considering the reentrancy attacks on Uniswap and Lendf.me, as well as the Yam Finance smart contract vulnerability, these high-profile security incidents in the first half of 2020 alone suggest that the industry’s explosive growth may have come at the expense of security and stability.

At the same time, the integration of DeFi protocols on the Ethereum platform also raises some existential questions: Aside from technical challenges such as network congestion or security issues, should DeFi, which is centered around decentralization, be defined by only a single network (Ethereum)?

The problem became more acute on Wednesday when the service of Infura, a major Ethereum infrastructure provider, crashed.

Real Value and Real Risk

There are approximately more than 100 projects and applications in the DeFi ecosystem, including decentralized exchanges, lending, and insurance platforms. DeFi has the potential to unlock a parallel financial system by popularizing currency, payments, and other financial services. However, as an industry, we should remember that trial and error can only extend so far when it comes to digital assets with real value.

For DeFi to have a sustainable future, developers must put security at the forefront of all their work and ensure that existing infrastructure and security measures can keep up with the industry's rapid growth. Most importantly, the industry needs to start communicating the risks to users to prevent new users' life savings from disappearing into the digital abyss.

If DeFi projects adopt the approach of traditional financial institutions, they should invest sufficient time to perform rigorous security audits and code reviews. In addition to implementing bug bounty programs to catch vulnerabilities before users lose money, projects should also be more transparent about exposing their network vulnerabilities by publishing open post-mortem analysis reports to the public so that other applications in the ecosystem can learn from these incidents and prevent them from happening again in the future. This transparency will help build trust among users and chart a safer path for mainstream applications.

Incidents this summer involving Yam Finance, bZx, and SushiSwap highlighted the serious shortcomings of current smart contract infrastructure and led to a series of security vulnerabilities related to human error.

Ethereum Solidity has shown some level of vulnerability since the infamous DAO hack in 2016. In the DAO hack, malicious actors used a “fallback function” in the target smart contract to create an execution loop to call the “withdraw” function of the victim smart contract until the victim smart contract’s balance was zero or the transaction gas was exhausted. However, Solidity is only one of many points of failure in smart contract design, and developers must consider many more potential vulnerabilities.

Smart contract development is still a relatively new field, and as with any emerging technology, security vulnerabilities and compromises are an expected and painful part of the process. Therefore, it is critical for smart contract developers to keep up with new security developments and keep up with best practices in the industry.

Deploying measures such as testnets, bug bounties, or phased rollout programs allows developers to reduce risk and catch bugs before a full product is released. In addition, developers building smart contracts on Ethereum also need to understand the peculiarities of the EVM (Ethereum Virtual Machine) and work around them accordingly.

Diversification

While DeFi works to solidify a sustainable future, the industry also needs to look beyond Ethereum.

After all, the ongoing debate about interoperability should apply not only to blockchain as a whole, but must also be equally extended to the industry’s most prominent use case: DeFi . In the traditional financial system, most payment infrastructure is interoperable, meaning that cardholders can make payments anywhere in the world, regardless of the local currency.

On the other hand, today’s chains exist in isolation and are still unable to communicate or exchange value with each other. Without cross-chain interoperability, DeFi will remain in the shadow of traditional finance. To address this problem, the DeFi development community has designed several different approaches to provide new forms of interoperability, including atomic swaps, tokenized tokens, and cross-chain communication platforms.

Solving these problems is critical to the development of DeFi as a whole, and the industry also needs to take a more collaborative approach to build a more diverse, DeFi-centric application ecosystem on different platforms, rather than sticking to one network (Ethereum).

In addition to Ethereum, other smart contract protocols are also developing their own DeFi ecosystems. These alternative projects will play a vital role in the DeFi field and may also open a new chapter in the development of DeFi. As the pioneer smart contract platform with the most token holders, Ethereum has a first-mover advantage, but further experimentation and diversification are needed to encourage innovation and make greater technical optimizations over time.

Image source: The Block

With the growth of new financial products such as (DeFi) savings, payments, and lending, we have begun to see major developments across the DeFi space. The industry has obvious appeal, not only to emerging economies, but also to companies that have been shut out of traditional finance in developed economies. In this digital age, DeFi has great potential to form new financial models in a democratized form.

But to step out of the shadow of traditional finance, DeFi first needs to overcome existing challenges and growing pains before it can flourish and fulfill its promise as a sustainable alternative to traditional finance. (Mengyan Finance)