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Hackernoon logoDeFi's Recent Sudden Boom Could Be Dangerous But We're Taking Steps To Mitigate The Risks by@jay-hao

DeFi's Recent Sudden Boom Could Be Dangerous But We're Taking Steps To Mitigate The Risks

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@jay-haoJay Hao

Jay is CEO at OKEx, the world's leading cryptocurrency spot and derivatives exchange

The crypto field is lively as ever in 2020, from platform tokens and the halvings of various PoW coins including bitcoin at the beginning of the year to the explosion of DeFi, and Filecoin's imminent mainnet launch.

Yet with all this action, I still firmly believe that DeFi will continue to be the hottest spot as we move into the second half of the year.

DeFi has been further thrust into the limelight lately with the launch of Compound's governance token COMP for trading. The price of COMP reached an astonishing $300 last month, compared to only $18 at the beginning of the launch. It has since seen a correction and is currently trading at around $180

Yet, COMP has driven the overall concept of DeFi tokens to skyrocket and it currently has more than USD$600 million locked up in the platform.

The Growth of DeFi

The growth rate of DeFi can be seen clearly when you compare it to the performance of other areas: Since the beginning of 2020, the S&P has fallen by 3%, gold price has risen by 17%, Bitcoin has risen by 27%, Ethereum has gone up by 76%, and the increase in DeFi is over 200%!

It’s noteworthy that 99% of DeFi applications are built on Ethereum. Given that, the increase of Ethereum's price is also, in large part, due to DeFi.

In principle, centralized crypto exchanges are in conflict with the concept of decentralized financial applications, however, the pace with which mainstream centralized exchanges are chasing DeFi is not slow at all. As of now, for example, COMP has already landed on 17 first-tier and second-tier exchanges.

OKEx, one of the largest cryptocurrency spot and derivatives exchanges, was quick to list COMP as well (Disclaimer: The author is the CEO at OKEX exchange). CTC spot trading against USDT and BTC opened at 06:00 Jun 29, 2020 (UTC). The depositing of CTC was available from 05:00 Jun 29, 2020 (UTC), and withdrawal from 09:00 Jun 29, 2020 (UTC).

DeFi projects similar to Compound are actually very practical. At present, the pledge loan business in the traditional financial market always faces some risks, such as the signing of a pledge contract without actual delivery, the risk of pledge right exercise, etc.

If smart contracts are used to realize automatic lock-up and make the entire process open and transparent, these risks can be solved well. OKEx has been committed to promoting the development of the DeFi, which is also an important reason behind the listing of COMP.

The Challenges DeFi Faces

However, the functions that DeFi can achieve currently are limited. Firstly, let's talk about pledge loans and decentralized exchanges (DEXs). The main reason for COMP price soaring is the aggressive introduction of Yield Farming.

However, the more funds deposited in the platform, the more risk is accumulated, especially when the essential demand for loans becomes arbitrage of mining. 

It is very likely that there will be liquidations when the price of the token plunges and COMP will face the first major challenge at that time.

Secondly, DeFi companies face greater security risks from traditional centralized exchanges. DForce, known as the Chinese version of COMP, was suddenly hacked in April.

The cryptocurrency worth about USD $25 million was stolen by hackers, and the users' assets on the platform were instantly reset to zero.

Fortunately, due to the lack of sophistication of the hackers and the support of all parties, the funds were finally recovered.

Another security incident happened just recently on June 29, when the two liquidity pools on the largest decentralized trading platform, Balancer, were struck by a lightning loan attack, and the value of the transferred assets was about $500,000.

Balancer's currently locked assets are worth USD $116.7 million, ranking fourth in the DeFi ecosystem.

From this perspective, are centralized exchanges and decentralized DeFi completely contradictory? Not necessarily.

What OKEx's Entry into DeFi Means

First of all, more centralized exchanges are listing DeFi tokens, allowing more professional users to enter, and the introduction of related derivatives offers them a mechanism to go long and short, to suppress the skyrocketing and plunges, and balance the risk (it is time go short yet?). 

Secondly, centralized transactions provide a richer security experience against hackers. This is also very helpful for DeFi projects, which are extremely vulnerable to hackers.

In fact, DForce blocked hackers with the help of mainstream exchanges and recovered their assets.

OKEx also has a marked footprint in DeFi. For example, on the OKEx-developed public chain OKChain, any user can build their own decentralized exchange. OKEx DEX will be an example of using OKChain to build DEX.

OKChain will also support the release of DeFi applications, and users can develop distributed financial application scenarios. Using blockchain technology and digital assets, developers can create and improve a highly autonomous financial system.

OKEx has always been paying attention to the ecological development of DeFi. As early as 2019, we collaborated with MakerDao’s DSR to provide services for users.

We are also currently cooperating with the Compound team on Oracle applications. In the future, we will provide even more ammunition for the DeFi ecosystem through OKChain, USDK, OKB, and other methods.

(Disclaimer: The author is the CEO at OKEX exchange)

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