🧱 Money Legos β€” Issue No. 57


It's one of those weeks where nothing jumped out at me in the crypto world on the technical front. Instead of weaving narratives where there aren't any, let's take a look at a few players in the emerging decentralized finance, or "DeFi," world. In issue number forty-one, we covered the elephant in the DeFi room: MakerDAO and Dai. Now, we'll cover some of the smaller but fast-growing projects emerging in this space.

First up is Uniswap, a decentralized exchange for trading Ether and ERC-20 tokens. Unlike a traditional exchange, Uniswap does not use an order book of buyers and sellers. Instead, anyone can provide liquidity for a given asset by locking it into the liquidity pool. Uniswap algorithmically sets the price of the asset based on liquidity vs. demand. Liquidity providers are rewarded with fees. Because of this design, it's very easy to integrate Uniswap into other contracts. A simple, inexpensive contract call enables a swap to occur seamlessly, and at a fair market rate, in any number of conceivable contexts. Currently, nearly $17M worth of digital assets are available as liquidity on Uniswap. Link.

The next project to look at is Compound, a decentralized lending platform that enables anyone to take out loans against collateral. Unlike Maker, which pays collateralized loans by minting a decentralized stablecoin (Dai), lending on Compound is peer to peer. Interest rates are set algorithmically, based on demand for borrowing vs. whats available to lend. Once again, Compound exposes an interface which makes it seamless to integrate into other smart contracts. A simple function call enables you to lock funds, earn interest, and extract them at a later date. Experiments with this capability are already underway, such as decentralized organizations where participants lock funds to earn interest, and use the proceeds to fund development of new projects. Compound has over $84M locked as collateral as of this writing.  Link.

The final project we'll cover today is InstaDapp. Unlike the other projects mentioned, InstaDapp does not provide a base financial primitive. Instead, it builds upon other projects-- including Maker, Uniswap, and Compound-- to provide its users with an intuitive suite of financial services. The team at InstaDapp has written their own smart contracts which combine the functionality of the other projects. This allows them to automate what would be complex multi-step interactions into a single click. It's a great example of how Ethereum smart contracts compose with one another. InstaDapp's contract interfaces can themselves be used by other contracts, furthering the layered growth. InstaDapp contract wallets now hold nearly $30M in digital assets. Link.

I've been saying for years that smart contracts were going to be hugely important, because they allow us to create new kinds of software systems that were not possible before. A common (and fair) follow up question to such an assertion is: like what? What are the use cases? Embarrassingly, it used to be a difficult question to answer. It's not any more.

Decentralized finance is the first utilization of smart contracts that really demonstrates their power and their composability. With thousands of users, and hundreds of millions of dollars locked, DeFi still far from mainstream, but it's also too big to write off. In retrospect, it's kind of surprising that DeFi was surprising. We created programmable money-- shouldn't it have been obvious that we'd program financial primitives? Apparently, it wasn't, but in permissionless systems, the good ideas have a way of bubbling up to the surface.

Finance is the first industry where we're seeing the disruptive power of decentralized cryptonetworks applied. I don't think it will be the last. The internet didn't merely disrupt the newspaper business. It went on to reshape every corner of our economy. Watching the rapid expansion of the nascent DeFi ecosystem makes me more confident than ever that we're in the early innings of a similar progression.

There are, however, some very real risks that come with this territory. In particular, I don't think we fully appreciate the possibility that a contract bug or hack could cascade throughout the ecosystem, and even threaten the security of the base Ethereum chain itself. A few percent of all ETH in existence is already locked in DeFi contracts. There's a non-trivial chance we'll code our way into a decentralized financial crisis at some point in the next few years. I've coined the term "DeFiCri", so at least if we do, it will have a cool name!

At the end of the day, though, the DeFi cat is out of the proverbial bag. Even if the current generation of solutions somehow collapse, they'll undoubtedly be built anew with the lessons learned. As usual, whats the one thing that's certain? Interesting times lie ahead!


62%. The "Maker Dominance" factor at the time of this writing, i.e. the percentage of money locked in all DeFi contracts that is collateral for Maker CDPs. This is down nearly 30% from just a few months ago, due largely to the growth of Compound, InstaDapp, and Uniswap. Link.

πŸ“’ Announcement

I launched a Dapp! Have you ever seen someone post a hash of a prediction on Twitter, then reveal the plaintext of that hash at a later date to prove they were right? If you have, you might be a nerd. Forehash is my just-for-fun side project which adds immutability and accountability to social commit-reveal prediction schemes. It's now live on the Ethereum mainnet. I'd love your feedback. Link.