The crisis under the iceberg: DeFi financial crisis and challenges

March 12 is a day worth remembering.

On this day, the digital asset market suffered a cliff-shaped plunge, and countless people's assets were halved overnight, and everyone began to re-examine the logic of the rise of the halving market;

Similarly, on this day, the DeFi market encountered a thrilling crisis of trust. Run-out withdrawals, liquidation like floods and beasts, and the experience of congested Ethereum networks, etc., have also caused many people to rethink the value and significance of DeFi.

DeFi (Decentralized Finance) Decentralized Finance was once regarded as a catalyst for the next round of the bull market in the digital asset market and a wave of leading the next wave of blockchain revolution.

Interestingly, since 3.12, people's attitudes have changed when they talk about DeFi: Some people say that DeFi is just a Lego toy for geeks, and it is difficult to have a large-scale popular application; some people say that DeFi's decentralization should be Weakening should be called Open Finance; there are even people who say that DeFi is caught in the vortex of centralized control, and there is a risk of fraud.

Any financial market crisis is essentially a debt crisis, and traditional financial markets follow the same logic.

The user mortgages "credit" assets and lends high amounts of funds from the bank. If the cash flow generated in the future cannot repay the loan, bad debts will be generated. When the bank has too many bad debts, it will encounter bankruptcy liquidation, and there will be a chain reaction between banks and banks. As a result, the financial crisis will inevitably occur. This is what we often call the economic cycle. Since the users mortgage all stable assets such as real estate, the volatility is relatively small, and even if the crisis occurs, the time span will be nearly 10 years.

In the early DeFi platform, due to the influence of the policy position, relatively stable assets such as credit, real estate, and fiat currency cannot be introduced as collateral. Only volatile digital assets can be used as collateral. Therefore, every big market volatility will affect the DeFi market. It was a financial crisis.

According to DAppTotal data of PeckShield, on March 12, the price of ETH fell from US $ 195 to US $ 114 in one day, and collapsed by 41.5%. Affected by this, DeFi platforms including MakerDAO, Compound, dYdX, etc .:

1) The value of locked positions has dropped sharply by US $ 460 million, and the lowest has fallen to US $ 700 million, a decrease of 39.5%;

2) ETH lock volume has been reduced by 40%;

3) The total amount of funds to be liquidated reached 23 million US dollars, of which MakerDAO was liquidated to 13 million US dollars;

4) Panic has caused a surge in the transaction volume on the Ethereum chain, and the GAS fee of the Ethereum network is as high as 5,112 ETH a day, approaching the historical peak;

5) Up to now, the average mortgage rate of mainstream DeFi platforms including MakerDAO and Compound is 355%.

The logic of the DeFi financial crisis broke out simply:

The digital asset market has plummeted, making the value of the assets pledged by users to the platform lower than the value of the assets that have been lent, resulting in indebted bad debts. The platform needs to initiate protection procedures to liquidate the user's mortgaged assets. In order to avoid the assets being liquidated, some users panic increased their mortgaged assets, and some users began to withdraw their mortgaged assets after repaying the assets. But unexpectedly, when a large number of operational demands flooded in, the Ethereum network began to congest. Not only are asset remedies for high-risk accounts to no avail, some of the originally low-risk accounts were also buried due to delays in platform feed prices and system congestion. In this way, the vicious circle became a trample DeFi financial crisis.

A pessimistic fact is that the high probability of the DeFi financial crisis will be the norm in the development of the DeFi market.

On the one hand, the overall market value of the digital asset market is only 200 billion US dollars, and a small amount of capital can cause large fluctuations in market prices, which is easy to be manipulated; on the other hand, the digital asset market is still in a blind spot for regulation, lacking such as fuse Such control measures, coupled with Ethereum performance defects, are prone to trampling accidents in a short period of time.

At present, in order to cope with the plunge, the DeFi platform has chosen to increase the asset pledge rate or expand the type of mortgage currency to reduce the risk . However, increasing the mortgage rate of funds will reduce the efficiency of asset use, and the expansion of the type of mortgage currency will change the linkage reaction of not falling prices.

 

In fact, the problem of platform stability caused by market volatility is only the tip of the DeFi iceberg. There are many potential problems and challenges under the iceberg.

 

Below, PeckShield will throw out all kinds of potential problems for your reference and discussion:

1. Ethereum performance congestion under panic run

Due to the mechanism of the upper limit of GAS fee for a single block of the Ethereum network, if there is too much transaction volume on the chain at the same time, it will inevitably cause congestion on the Ethereum network. This is due to the current public chain performance of the Ethereum network. Bruised.

When the market plunges in a short period of time, some DeFi users will temporarily panic add mortgages or repay loans to avoid liquidation caused by the plunge. However, when a large number of operations are initiated, the Ethereum network will be subject to certain queuing pressure, and some users will increase the GAS fee to seize the packaging resources, which makes the transaction volume within a single block smaller, and the entire Ethereum network Become abnormally congested.

As early as Fomo3D became popular in 2018, hackers took advantage of the GAS fee increase to congest the Ethereum network and undermine the fairness of the game, taking away the grand prize. Last year, when FairWin was hot, there was also a congestion on the Ethereum network due to a sharp increase in transaction volume.

For the DeFi platform, this is probably a contradiction that is difficult to balance. As long as the currency price plummets, a panic run will occur, and the Ethereum network will be congested, and congestion will lead to innocent users who would otherwise be immune from liquidation. In the long run, the DeFi platform experience will greatly decline, and it will be fundamentally unattractive. .

However, it can be optimistically expected that with the improvement and upgrade of Ethereum's scalable layer and sharding technology, this congestion defect caused by the GAS fee cap mechanism can be effectively alleviated, but before this, it will restrict the DeFi platform A flaw in development.

Second, the unfair problem caused by the oracle feed price node manipulation

In a world where the crypto world is completely decentralized, there is also a fundamental flaw: off- chain data black holes .

Even if the data on the chain is credible again, its true and false cannot be effectively monitored before the data is chained. At present, the solution agreed by the industry is the Oracle oracle machine. Taking the DeFi platform as an example, the real-time equilibrium price after the market plunge will be reached by a consensus of the oracle machine. After confirming that the data is accurate, the price will be fed to the major DeFi platforms for the DeFi platform. The liquidator of the reference refers to the next liquidation operation.

At present, the mainstream DeFi platform, MakerDAO, Compound, dYdX and other platforms are inseparable from the price feed service provided by Oracle Oracle.

There is another contradiction here. Behind the decentralized DeFi decision-making platform, there is a centralized man-made oracle machine pricing system. How can we ensure the fairness of liquidation? There are two problems : 1) Due to the voting mechanism of the Oracle consensus node, the price given may be delayed compared to the actual price. Like the price-linked consensus scheme given by chainlink, it also needs to run on the Ethereum chain. Affected by the congestion of the Ethereum network, there is a delay; 2) The role of a purely centralized liquidator is suspected of being manipulated, which is more obvious on many centralized DeFi platforms.

In fact, this problem has been exposed. The current flaws in the price prediction mechanism of the blockchain predictor, how to make the off-chain data as real and objective as the on-chain data, and can be synchronized in real time? Obviously, this is an unsolved problem at the moment when the oracle solution is not yet mature.

3. The potential systemic risk control problems of Lego building blocks

Not long ago, the liquidity loophole caused by the lightning loan on the DeFi agreement made everyone realize that the risks of the DeFi market may not be limited to the platform itself. Since the funds on the DeFi platform can flow across platforms, there are many LEGO building blocks in the market, and the model innovation of a single platform is likely to create vulnerability risks in other platforms.

For this bZx vulnerability, the hacker used the lightning loan model innovation on bZx to obtain a huge amount of operating principal, and then used the liquidity defects of platforms such as Uniswap to use leverage to create the price difference of the platform, and then through the cross-platform The price difference space realizes zero-cost wool operation.

Such vulnerabilities are themselves business logic vulnerabilities, and the relationship with the code technology layer is not too large. The vulnerabilities in the code layer of financial products can be solved under the investigation of third-party security companies, while the vulnerabilities in the business layer often come from the market circulation level, depending on whether a market is stable enough, whether there is sound supervision, whether the market liquidity is full, etc. aspect. Obviously, there are still too many problems to be overcome in the market business layer of the DeFi platform in the early stage of the market.

In fact, it is necessary that the platform not only ensure that there are excellent code audits and vulnerability investigations at the technical level, but also take into account the systemic risk control issues of the larger market level when model innovation.

This undoubtedly raises new challenges to the security of the DeFi market, because the small flaws in any one platform may become the entry point for hackers to attack the entire DeFi market.

4. The running problem under the pressure of DeFi platform

This is definitely a question of extreme fear.

Not long ago, the FCoin thunder made everyone realize that small and medium-sized exchanges, and even some large exchanges, as long as they are centralized exchanges, they may induce "running" behavior under the stimulation of unknown black swan market fluctuations.

Just like FCoin, when the flow and funds are swarming, the project party has not made enough security measures. It is too late to find out that the debt is not insolvent one day, and the founder has to flee the money. Way out of embarrassment.

It is no exaggeration to say that this possibility also exists in the DeFi world. Because as the DeFi market continues to grow, some new DeFi platforms that focus on financial innovation and various gameplay will come out one after another.

As the forest grows bigger, the DeFi market will most likely reproduce the chaos in the exchange market. There are more and more small DeFi platforms, and all kinds of dazzling innovation models will appear, as well as some wool parties that go ahead and succeed regardless of risk. In the past, it is inevitable that some DeFi platforms will run away due to the problem of capital run-off.

In essence, the DeFi platform is a service platform for user funds custody and matching. The private key of the fund pool contract is also controlled by the project party. Once there is a problem of capital turnover, bad debts are generated, and things like running roads also occur. Not surprisingly.

Conclusion

Overall, the DeFi track is becoming a focal area of ​​traditional financial integration blockchain technology due to a series of financial features that are combinable, extensible, and landing.

However, it should be noted that while the DeFi market opens the future of magnificent application prospects, it also quietly planted the seeds of crisis under the iceberg, including hacker attacks caused by potential security vulnerabilities in smart contracts, due to currency price fluctuations. Platform clearing problems, congestion problems in the Ethereum public chain caused by liquidation problems, delays in the price prediction of the predictor machine due to the information black hole in the off-chain, and even the potential running problems of centralized asset custody and so on.

In any case, in the depth of the DeFi industry, we must experience all the problems that may occur during its growth. This is also a process that the DeFi market must go from niche to mainstream and from rash to maturity.

Beautiful and exciting, noisy and graceful.