[Coinlive Talk] Paving the Way for the Future of DeFi

• After multiple crashes on the part of centralised platforms, many are fleeing towards decentralised alternatives for safety
• Decentralised exchanges not only offer a comparatively more transparent alternative to the characteristic opacity of centralised exchanges, they also offer opportunities for ownership and participation in market-making
• However, due care and attention should still be taken when using either of the two platforms, such as password security and research

2022 has been fraught with a myriad of speedbumps and crashes within the crypto industry. From the Ronin bridge exploit in March that saw up to $620 million being stolen from the protocol to the toppling of giants with the likes of Celsius, Terraform Labs, and Three Arrows Capital, it is no wonder that levels of fear, uncertainty, and doubt (FUD) have since reached all-time highs. Positions were closed and funds have been withdrawn across the board, resulting in the market dropping to $800 billion after hitting record highs of $2.9 trillion in late 2021. The collapse of centralised exchange FTX added further fuel to the fire recently as well, leading many to speculate that the crypto industry is invariably on its last legs.

Yet one may argue that the premise for these shocks lie away from the heart of crypto however. As Scott Kominers and Shai Bernstein write for the Harvard Business Review: “They reflect a specific segment of the market that was driven by opaque, centralised institutions that made it difficult for their customers to understand the risks they were taking.”

Indeed, billions of dollars have fled from centralised to decentralised exchanges in the wake of FTX’s collapse. Data from analytics platform DefiLlama indicates that trading volumes on decentralised exchanges have sprung 11% over the past month, an echo of Vitalik’s own sentiment on the issue: “centralised anything is by default suspect”. Transactions on decentralised exchanges such as dYdX hit 97%, and users on lending protocol Aave also shot up 68% as well.

Truly, an industrial migration towards decentralised platforms seems to be underway. To find out more about the differences between centralised and decentralised exchanges, we speak with Imran Mohamad, the Head of Marketing at Kyber Network, whose core product KyberSwap serves as a decentralised exchange and aggregator.

“It’s now very clear that prices are depressed, and there’s a lot of loss in user confidence and interest.” he muses. “People are actually looking for safe havens.”

While centralised exchanges with the likes of FTX and Robinhood often bear with them an uncanny resemblance to most Web2.0 exchanges that many might feel familiar with, in so doing they also bring along similar traits of obscurity and opacity.

“The benefits of participating in a centralised exchange is that you don’t have to think about custody too much,” Imran explains. “There are less steps because it is a familiar technology for users and developers. But they require users to trust that the platforms are holding your assets securely.”

This trust however, has been shaken in the wake of the collapse of centralised institutions such as FTX and Celsius. Clearly, it has become simply difficult to grant default levels of trust to these centralised entities, even if they do seem to promise greater ease of onboarding. Imran argues further that decentralised exchanges on the other hand, offer up greater levels of transparency and opportunities for participation.

“The whole point of a decentralised exchange is to provide users with privacy and self-custody in a transparent and permissionless way so that you can hold on to your own assets without needing to trust in an external party” he says.

“Decentralised exchanges also allow users to come together and provide liquidity and participate in market making. Whereas in the past where market making is typically restricted to the big boys and financial institutions, DeFi (decentralised finance) completely turns this notion on its head.”

Indeed, where centralised exchanges such as Binance often adopt the method of using off-chain order books to match buyers and sellers, decentralised exchanges like KyberSwap rely upon an Automated Market Maker (AMM) model. The model primarily seeks to maintain balance in its liquidity pool that holds a token pair. The token prices will be aggregated in accordance with the token ratio to facilitate trades while balancing out the liquidity pool, allowing buyers and sellers to conduct trades without any broker or third party.

Coinlive’s Interview with Imran Mohamad, Head of Marketing, Kyber Network

As a decentralised exchange and aggregator, KyberSwap operates on 14 chains in DeFi, including Ethereum, Polygon, and Arbitrum, and offers liquid staking services and data analytics on top of its role as a crypto exchange.

Yet DeFi protocols are not immune to hacks and attacks, as the past year indicates. The Wormhole Bridge exploit in February saw over $320 wrapped ETH (WETH) siphoned out of the cross-chain bridge. Beanstalk Farms, a protocol designed for aggregating supply and demand for digital assets, also experienced a major attack later in April, with $182 million stolen by taking over the protocol’s governance system.

“I think the mistake that many builders make is that they’re trying to rush into the market,” Imran ponders. “So, this results in insufficient checks, or worse, they just completely fork an existing protocol and re-package it for convenience.”

Forks, which are changes to a blockchain’s underlying protocol, can range from a minor upgrade to a major overhaul and rework and can be initiated by both developers and community members. A soft fork for instance, is an upgrade which is backwards-compatible, meaning that users or validators on the protocol who have not implemented the upgrade may still continue using the chain. A hard fork on the other hand, is an upgrade that often leads to a permanent chain separation and is not back-wards compatible. Some notable hard forks in the past include the creation of Bitcoin Cash, a forked version of the Bitcoin blockchain, and Cardano’s Vasil upgrade.

As Imran explains, a fork can take place when the code of an existing protocol is transplanted into a new protocol and given a new name to pass off as a completely new product. The problem with this however, is that developers may not actually understand the underlying code, which is when vulnerabilities and loopholes begin to present themselves.

“Apart from building everything from scratch ourselves here at Kyber, from codes for limit orders to perpetuals, we also ensure that we do a smart contract audit before the code goes live,” Imran says confidently. “Our open-source API developers are constantly scrutinising our codes and giving us feedback, and we also offer bug bounties. For us, security is really the top priority.”

However, Imran also urges users to also be mindful to perform their own due diligence when using DeFi protocols.

“No real protocol or project will ever ask you for your passwords,” he cautions. “Never give your passwords or seed phrases away, and be discerning about what projects are safe to access. Finally, don’t invest more than you are prepared to lose. Everyone needs to be aware that any cryptocurrency today could potentially go to zero tomorrow.”

To close off the interview, I had a final discussion with Imran regarding the inherent need for decentralised protocols and their place in the future.

“I think there will always exist users who inherently distrust centralised instituions,” Imran says firmly in response. “More importantly, in some absolute worse cases of centralisation failure, people have been prevented from accessing their funds in state banks. And these are real world situations happening right now in developed economies.”

Indeed, just as Imran says, there will always be a divide between proponents and opponents of decentralisation. Yet it is undoubtable that if nothing else, the underlying technology that props up the entire blockchain ecosystem and structure of self-governance is nothing but revolutionary, and certainly provides some much-needed alternatives in these unpredictable times.

“Not everyone may be on board with decentralisation,” Imran says as we close off the interview. “But it does provide more options for everyone to consider, which is already a plus.”

This is an Op-ed article. The opinions expressed in this article are the author’s own. Readers should take the utmost precaution before making decisions in the crypto market. Coinlive is not responsible or liable for any content, accuracy or quality within the article or for any damage or loss to be caused by and in connection to it.