To Secure a Sustainable Future for DeFi, We Need to Look Beyond Ethereum

By U-Zyn Chua, CTO and Lead Researcher at DeFiChain

It is common knowledge that the advent of blockchain technology disrupted traditional governance structures and democratized access to finance. While distributed ledgers and decentralized machine consensus can radically reduce transaction costs and disrupt traditional financial systems, a discrepancy between its conceptualization and its aim to be a secure financial ecosystem with actual value cannot be wiped off the table. This is especially true for decentralized finance (DeFi), where exploits and “rug pulls” rather than substantial evolutionary developments have dominated the news in recent weeks.

Most of today’s DeFi projects run on blockchains like Ethereum, Binance Smart Chain (an Ethereum fork), Tron or others. They all share similar architectures, whereby decentralized applications (dApps) run on virtual machines on a blockchain. Unlike native blockchains, Turing-complete blockchains offer greater flexibility for developers where code can be executed directly and freely on the virtual machine layer on a blockchain. While this design paradigm may seem useful for a variety of different applications, it is however very risky for DeFi applications where transactions worth billions of dollars are taking place every single day.

There are currently thousands of dApps running on the Ethereum blockchain — a Turing-complete blockchain which aims to facilitate a peer-to-peer, general purpose worldwide computer on which anybody can virtually run anything and where the only limit is one's imagination, and gas limits. This “one-blockchain-fits-all” approach may seem tempting at first glance, but it entails a number of issues which should not be overlooked or underestimated. Most of these issues manifest along the layered smart contract deployment process.

This process can be divided into three distinct steps, on each and every layer along the code’s execution process. Firstly, since most smart contracts on Ethereum are written in a high level programming language such as Solidity, human errors and coding bugs can occur at any time during this process. These language “gotchas” are especially common in code written by inexperienced Solidity programmers, and are often missed or glazed over, even during audits, due to the attention required for long periods of time and other complexities. Secondly, the compilation layer is prone to compilation errors and security issues which often go unseen or are hidden on the Solidity layer. Lastly, due to its Turing completeness, the virtual machine layer opens up an almost unbounded attack surface which can be associated with the many lines of instructions needed to perform simple tasks like adding liquidity to a liquidity pool.

All these steps combined with Ethereum’s gas fee-based consensus mechanism makes the protocol tedious and expensive to use. Though it may have made sense a few years ago, the Ethereum blockchain network has since become a bottleneck. Hence, new solutions have to emerge to tackle these immanent problems via scalable, secure and cost-efficient transactions performed directly on the consensus layer of the blockchain.

In recent months however, we’ve already witnessed first steps towards this new future, with a number of DeFi protocols moving away from blockchains where DeFi transactions run on a virtual machine to those done natively on the consensus layer. Yet, it would be overstating the case to postulate that every project should change platforms now, but an unbiased approach where pros and cons are juxtaposed — especially for DeFi projects — may be the best way to go forward for protocols feeling the need to change platforms.

When it comes to Ethereum’s main selling points, first and foremost, the network effects have to be mentioned. These multiplying network effects of the Ethereum ecosystem may outweigh potential negative implications in the short term, but more has to be done to upgrade the network as a whole. Every layer-2 dApp built on the Ethereum blockchain should communicate freely and openly with each other, building “money legos” in an ever expanding ecosystem. This composability could actually be the main driver in the decision-making process on which platform projects use as their launch platform. This interoperability directly correlates to an active programmer base, which further develops the Ethereum blockchain and ecosystem.

On the other hand, projects trying to move away from the Ethereum ecosystem may experience a sudden drop in liquidity and connectivity. This connectivity between different service providers within the Ethereum ecosystem is achieved by using the common ERC-20 standard. By using this standard, anyone is able to create their own coin within a few minutes and connect it to an ever-growing system of liquidity providers — both centralized and decentralized. In addition, exchanges and DeFi listing partners may be more welcoming in accepting an ERC-20 token than a newly established token standard.

Though these are valid reasons for any project and any developer to consider staying in the Ethereum ecosystem, one should not praise the day before the evening. Ultimately, the end user is, and should continue to be the one who dictates the raison d’etre and the long-term trajectory of any project. If the user rates security, a reduced attack surface and a more moderate fee structure more important for his or her financial applications, then DeFi projects should follow suit and migrate to alternative platforms that offer that.

So far, DeFi is attracting huge amounts of liquidity, both from retail and institutional investors alike. This influx of fresh capital will continue as long as the benefits outweigh the risks. Like with all nascent innovations, there are teething problems and the sector as a whole has to overcome those in order to level a prosperous breeding ground for even more radical and disruptive fintech innovations.

If the past is any indicator of future success, then it’ll be hard to stop this DeFi train approaching its final destination — financial freedom for people all around the world.

About the Author

U-Zyn Chua is the Co-Founder and CTO of Cake DeFi, and CTO and Lead Researcher for DeFiChain, a native DeFi blockchain built on Bitcoin Core to enable fast, intelligent, transparent and secure decentralized financial services.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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