Open Forum Series by Tagion #2: DeFi Chat with On Yavin and Gary Bernstein

Published on Aug 31, 2020 20:08 By Guest Author

Open Forum Series is initiated by Roxana Nasoi, Chief of Strategy at Tagion/i25s ApS. The series consists of live chats happening every quarter in the Tagion Telegram Chat, with reputable guests and community members. The main purpose is to have quality conversations and understand what the pain points are, the solutions, and what can be improved in existing systems. The 2nd Tagion Open Forum took place on Tuesday, August 18th, lasting for 2hours, between 5PM and 7PM UTC time. If you would like to take part in one of the next sessions, please reach out to Roxana at [email protected].

Date & Time: Tuesday, August 18, 5PM - 7PM UTC.

Participant Count: 50.

Tagion hosted the second edition of Open Forum Series on the topic of DeFi (decentralised finance), with main guests On Yavin, Founder at Cointelligence (and author of the DeFi guide) and Gary Bernstein, Founder at CoTrader. Over two hours, led by Tagion CSO Roxana Nasoi, the conversation ranged from the state and direction of the industry to details on approaches to handling today’s DeFi issues.

Here, we present an overview of the main themes and points made by our guests and community members. At the end of the overview, we have some recommended links for further reading as well.

Bitcoin and DeFi

On Yavin puts it in broad terms: “DeFi is a risky but exciting environment for people to take control of their money and find new ways to use it. It's lowering or entirely removing the bars of entry to financial markets that have previously only been available to the wealthy. The possibilities are really exciting, though it's early days yet.”

These early days are opening new avenues for investors, large and small, to explore, but calling it “early days” is not hyperbole. In DeFi terms, a cryptocurrency or dApp is not necessarily a DeFi instrument.

Gary Bernstein sees it such that, “By some weird narrow definition of finance, Bitcoin can be considered finance as in the creation of money, but this lacks the full definition of finance that DeFi on Ethereum can do, i.e. it cannot create on-chain mechanisms to create financial instruments. […] DeFi Cambrian era is fulfilling a large part of what some consider Bitcoin’s promise: to replace the financial system.”

Danielle Tichner, founder at W-Source and FuturaeX took the discussion into BTC and WBTC, as well. “In Futures and Options, Bitcoin is an underlying asset. What about WBTC?” Liquidity wise, the current stats showed that numbers were higher for WBTC (6,785) versus BTC: (5,738). For more details, check the links in the footnotes.

Use Cases

“I very much like this statement: A lot of times when people talk about "banking the unbanked" or have a project that means that, they just mean savings and payments. Banking is much more than these two. DeFi still has a long way to go, but at least it's also tackling the other things that these other projects failed to address or erroneously stated that they were not needed.” Travin Keith, Independent Consultant in Crypto.

Enabling decentralized exchanges (DEXs) is seen as the primary use case for DeFi, though, as On Yavin notes, “I think DEXes will be the most important use case but we are not there yet; we need to mature more much much more!” Moreover, despite the “banking the unbanked” mantra that is heard in fintech in general, the situation is more complex than simply offering money transfers and savings.

As Tagion CCO Kristian Vestergaard put it: “as an example, a big part of banking is being able to provide loans to everyone, based on some sort of reassurance for the money being paid back - that's not really part of the "banking the unbanked" package yet, but has to be for it to break mainstream.”

Increasing opportunities outside of the current banking system is definitely something that practitioners are looking at down the road. On Yavin sees that, “I don’t think we are ready for it now, but for the long term I see the unbanked get banked with DeFi.”

Price Discovery and DEXs

One of the interesting highlights was the debate between price discovery and AMMs (swap DEXs).

Theis Simonsen, CEO at i25s, argues that “Exchanges can order bids and asks, do price discovery, matching and settlement. A DEX just does this decentralised, meaning you need the ordering to do this, which probabilistic blockchain cannot deliver.”.

Gary Bernstein from CoTrader states that “the DEXs that matter are basically iterations, improvement, versions of the Bancor mechanism - the original AMM DEX - includes Uniswap, Kyber, Balancer, etc. […] You do have real products. These are highly abstract defi instruments, for example.”

In demonstrating how AMMs are superior to DEXs such as EtherDelta, which we can reference as 1.0 DEXs, Gary explained that AMM can be a reserve of 2 tokens, for example.

COT / ETH

COT / BNT

COT / USDB

The price would be here the reserve ratio of A to B. No need for anyone to be buying or selling. The AMM (swap DEX) would always trade with you at the rate of A / B. AMM main aspect is there are no orders at various prices. Just 1 price - A / B.

Another example: stable to stable token trading, to keep 2 stables at $1 vs $1. There are fees to be earned in that trade, and the benefit to the world is more stable stables.

“Price discovery isn't a judge of morality.” - Gary Bernstein.

The State of DeFi

Given the early August collapse of Yam due to a bug in its governance code, the state of the industry is fresh on peoples’ minds. Two issues stand out in particular, namely scams and the relatively recent beginnings of current DeFi endeavours. Regarding the latter, On Yavin states that, “I think everything is a challenge, at the moment. Regulation is not clear regarding DEXes and I suspect it will take a few years to have real regulatory clarity, which is damaging progress. Everything around security of all types is not there yet.”

On the bright side, though, there is evidence supporting a positive view of the industry. Gary Bernstein pointed out that, “Dex's are certainly a key component. While there are lots of sh*tcoins traded there, let's say, that's really not the interest or problem of the DEXs. The market has matured by leaps, and now projects with yields and revenues are dominating. Within days, DeFi discovers them. Meanwhile, some do also end in vulnerabilities discovered.”

He also added that, “Auditing is typically to be done using professional 3rd parties, but they're not a 100% certainty. Community assessment can also be effective, with bug bounties offered. The onchain insurance concept is very interesting. Insurance contract would gain a % as long as X doesn't happen, and be emptied otherwise.”, and that “DeFi mechanisms can service everything in the world, just as finance does, e.g. to raise funds for new projects, to create mechanisms by which to do so.”

As in any financial undertaking, running across scammers is a threat. “Scams are indeed a greater factor as it's easier to get on than in a CEX. This is one of the many cases where added benefits (greater accessibility in terms of direct blockages like country restrictions) bring along added responsibility (having to verify for oneself even more).”, says Travin Keith.

“Despite its relatively small market share in both the crypto world and the broader economy, DeFi is still a force to be reckoned with. In early 2019, the Total Value Locked in DeFi collateral was just $275M, so the growth rate over the span of the year was impressive, as was the further increase from $1B to $2.5B from February to July. While we can’t necessarily expect DeFi to retain that level of growth over time, there’s strong evidence that it will maintain positive momentum as more and more people grow interested in digital assets and new ways to engage with financial markets.” - On Yavin.

“It all depends on how fast banks act. In developing countries, within a decade, you can see a huge jump from poor to middle class. Specifically, countries in this category want 3 things: access to education, access to healthcare, and access to banking. This is a perfect match for banks to aggresively launch a campaign and onboard customers. […] DeFi alone can't aid the unbanked, beyond the financial services part, unless we have a bridged ecosystem: education - healthcare - finance working hand in hand.” - Roxana Nasoi, CSO at i25s.

How to address scams, maintain privacy – these are issues that run deep in the DeFi community, and proposals (with their obvious drawbacks) vary from dedicated gate-keeping to community voting and beyond.

“Cashing out is a different problem than DeFi per se, but has some e.g. P2P solutions. As people use eg EthYuan more and more, it could tilt towards a kind of revolution, perhaps.” - Gary Bernstein.

“The problem with EthYuan is the lack of privacy, ETH per se isn’t private, it’s actually terrible in terms of privacy and anonymity” – Roxana Nasoi.

Gary argues that “privacy mech’s being worked out with ZK, for example. For now, there are better options like Monero”.

Travin Keith added that, “Right now there is an overcollateralization requirement, but I think we are working towards a system where this may not be a requirement for some. I think a merit-based system can emerge where people who are confident that others can pay back can perhaps even cover part of the collateral. For me, that's when things will really become exciting”.

In regards to voting, the Open Source community has shown for decades that reputation and respect can also be very viable. “Algorithmically weighed, so bots that come in and vote don't get as much as a person who has consistently voted correctly for years. Perhaps something similar to the Proof-of-Importance system in NEM could be used. One project called Sora also has a voting system which takes into consideration factors like this. It can be done as well completely without direct financial incentives. A lot of times people think this is necessary” – Travin Keith.

“There's huge demand for reputation systems, to be fair. I've yet to see a centralised or decentralised proposition that deals with all the issues of reputation, and the corruptibility of data. Just because it's on a blockchain, doesn't mean the data before wasn't corrupted.” - Roxana Nasoi.

DeFi and Regulation

“As Grant Gulovsen wrote in an op-ed on Coindesk, staking / masternodes are unclear from a regulatory standpoint. If you build experiments, it's fine, but if you want to target mature markets and come up with an alternative, it needs more validation before breaking into the wider markets.” Roxana Nasoi, CSO.

“I think we made huge progress in the last 3 years since I joined the industry. We went from a situation of war with governments and banks to a situation of most gov accepting crypto and most banks realized if you can't beat them join them - having said that I think the wild wild west is back with DeFi now and as much as I am bullish on DeFi for the long term I think we are going to see another huge crash as we have seen with the ICO craze. Right now most DeFi projects are either scams or bullsh*t projects, only a few of them are going to be long term successful projects.” - On Yavin.

***

Special thanks to our guests and hosts:

Gary Bernstein, Founder at CoTrader. Defi fund marketplace.

On Yavin, Founder at Cointelligence.

Travin Keith, Independent Crypto Consultant.

Danielle Tichner, Founder at W-Source and FuturaeX.

Tagion Team:

Theis Simonsen, CEO;

Kristian Vestergaard, CCO;

Roxana Nasoi, CSO, Privacy Advocate.

Additional Links:

Yield farming: https://boxmining.com/yfi-yield-farming/