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For instance, he says, one of the main assets underpinning the DeFi ecosystem is Dai – a stablecoin, issued by decentralised organisation MakerDAO, which is roughly pegged to the dollar via cryptocurrency collaterals. Karl Floersch, a researcher at the Ethereum Foundation, thinks there is risk that a “cascading failure” could simply put an end to it all. By August 2020, that figure was close to $5 billion in Ether and bitcoin today, the value of locked Ether only has skyrocketed to over $55 billion. In December 2019 about $1 billion in cryptocurrencies was underpinning DeFi protocols. ICOs were no more, but the scramble to grab the governance tokens du jour, and get a piece of this or that DeFi protocol, was deeply redolent of 2017 – even if research suggests that the people engaging in this new gold rush are more financially literate than the poor saps who lost their shirts in the ICO frenzy. That lent itself to the usual crypto-adjacent zaniness: projects hyped to the moon and then immediately crashing memes and food emojis that – well before the GameStop craze and Elon Musk's romance with joke-turned-token Dogecoin – have been traded like precious assets and of course the occasional scam. By late-2020, the hottest thing in DeFi had become something dubbed “yield farming’”, a mechanism to earn new cryptocurrency tokens just by depositing other tokens on decentralised lending markets. The following months – what with the chaos and panic around the global pandemic, coupled with several regulatory crackdowns on centralised cryptocurrency exchanges – only made DeFi protocols such as MakerDao, Uniswap and Compound more popular amid the crypterati and the budding investors. Cue a debate about whether the trader could be labelled “a hacker” or simply someone who had read the fine print, realised that bZx could be gamed and acted accordingly. The trader had transformed no money into a lot of money. The best bit? The money used in the coup de main had been borrowed from a platform that allowed users to take cryptocurrency loans – for a very short period of time: hence ‘flash loan’ – without providing collateral. On that day an anonymous trader managed to get away with a profit of $350,000 in Ether from lending platform bZx, after deliberately pumping asset prices on the exchange bZx relied upon to get its pricing data. One of the first and most infamous manifestations of this unpredictability is the “flash loan” incident that sent waves through cryptoland on St Valentine’s Day 2020. But some of them end up interacting in unforeseen ways.”
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“So some of these ‘LEGO building blocks’ are quite interesting and do things that Wall Street cannot do. These are being built mostly by amateurs who do not understand how actual finance works,” says Emin Gün Sirer, an associate professor of computer science at Cornell University, and founder of cryptocurrency outfit Ava labs. “People are building really interesting – but mostly experimental – tools. That is exciting, but not complication-free. After the crash, Ethereum started crawling with a host of services – DAPPs, or decentralised applications – offering a wide range of financial operations, from loans, to futures, to exchanges, to algorithmic trading. Rather than bitcoin, its ascension has been tightly linked to Ethereum, the world’s second cryptocurrency, whose decentralised network – or blockchain – allows for the provision of services and the execution of more complex tasks than just sending and receiving payments.Īrguably, it all started just after the ICO bubble of 2017, when thousands of entrepreneurs and chancers raised billions by selling cryptocurrency tokens online as if they were stocks in – often non-existing – companies. In recent years, DeFi has emerged as one of the most consequential developments reshaping the cryptocurrency world. Still, Square’s project might end up being remembered as a watershed moment – the moment decentralised finance, or “DeFi”, finally entered the mainstream. Amid the customary, constant online noise surrounding cryptocurrency – looking at you, Elon Musk – these days, you would be forgiven for not giving Dorsey’s move the time of the day. Last week, Twitter CEO Jack Dorsey announced that Square, the financial company he also runs, will be launching a new platform for creating decentralised finance projects using bitcoin.