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ETHDenver: MakerDAO, Fulcrum and the risks of DeFi
ETHDenver: MakerDAO, Fulcrum and the risks of DeFi
Defi

ETHDenver: MakerDAO, Fulcrum and the risks of DeFi

By Lorenzo Dalvit - 18 Feb 2020

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ETHDenver, the event dedicated to Ethereum that has just ended in America, has hosted for obvious reasons MakerDAO and Mario Conti, Head of Smart Contracts at Maker, who focused his speech on the problem that emerged with Fulcrum and the risks connected to the DeFi system.

Conti learned about cryptocurrencies in 2014 in Argentina due to the hyperinflation his country suffered, from there he ventured into the Ethereum ecosystem until he met the team with which he would contribute to the realization of the Maker system.

MakerDAO allows the creation of a cryptocurrency, token using the ERC20 standard, based on the Ethereum blockchain, capable of stabilizing its price around the value of one dollar. This token is called DAI.

The complex system designed by the team aims to disintermediate the process by giving decentralized government to the protocol, or at least this is the attempt.

The numbers of MakerDAO

We are currently observing a significant growth of the DAI created by Maker’s smart contract:

More than 125,000,000 DAI in total have been created by putting almost 2 million ETH as collateral. This means that the total number of ETH in circulation has decreased by almost 2% thanks to those constantly locked for the issuance of the stablecoin DAI.

More than 56% of the DAI in circulation are within the DSR: Dai Savings Rate, this acronym is intended to specify the mechanism by which it is possible to lend DAI by locking them in a smart contract dedicated to lending, which in various forms and structures offers a passive income. One of these is Aave.

For the moment we will not go into the technicalities related to the system: in order to go further in our reasoning we just need to think that the MKR token was created to govern the internal dynamics of the protocol of the DAO, Decentralized Autonomous Organization. 

MKR tokens are used to decide how the protocol evolves and benefit those who hold them thanks to a deflating system. MKR tokens are burned every day thanks to stability commissions, liquidation penalties and surplus auctions. 

All for a current value of about 10,000 DAI – 10k dollars, which decreases the MKR in circulation. From 1,000,000 now to about 987,640.

The fluctuation of the price of MKR depends on the traditional dynamics of buying and selling, and therefore on the matching of supply and demand on the exchanges, but its quantity is destined to decrease thanks to Maker’s DAO.

The five great achievements of MakerDAO and DAI

Mario Conti’s intervention would have liked to focus on the great success of MakerDAO and the great boost that DeFi, decentralized finance, experienced thanks to it. But unfortunately, Fulcrum and bZx, DeFi protocols using DAI, suffered the unexpected theft of $350,000 through a Flash Loan attack

This problem affected the theme at the Denver conference which, after quoting some important numbers, turned its attention to systemic risks and focused on its fragility.

Maker’s great satisfaction, overshadowed by recent cases of the Fulcrum attack, lies in observing the five achievements of the DAI token:

  1. DeFi is the number one use case for ETH;

  2. DAI is a disintermediate stablecoin that acts as a means of exchange, fundamental for the Ethereum blockchain struggling with the volatility of ETH;

  3. DAI is supported by all dApps in DeFi;

  4. DSR and Dai are attracting new projects that are growing in number every week;

  5. DAI is the standard stablecoin on Ethereum.

Mario Conti says:

“It freaking works!”

The eight security issues related to MakerDAO and DAI

  1. Bugs in smart contracts: despite the extensive checks, there may be a Formal Verification Fallacy.

  2. MKR governance attack: it can be mitigated, but it is a real problem related to the DAO governance system – remember The DAO case about which many articles have been written.

  3. MKR whales collusion: the problem of apathy in voting, a low interest in government could centralize in a few addresses the majority of MKR and lead to the collusion of a few actors able to divert the choices in their favour, exposing everyone to the risks of an attack.

  4. Bad governance: a series of bad choices in governance could create big problems for the whole sector.

  5. The black swan: an unexpected event – a 50% ETH collapse could be lethal and cause the DeFi system to collapse. We went from the $800 price of Ethereum to $80 without problems in 2018, but it was a bearish market that lasted 2 years, a violent collapse could be fatal.

  6. Oracle attack: The external price reference on which the MakerDAO contract that manages DAI’s stability relies, is a real off chain figure. The oracle that is asked to obtain the data is a point of attack. For this reason, the work of Chainlink is fundamental. The only measure foreseen at the moment is to postpone by one hour the effects produced by the datum in the hope that in case of an attack, 60 minutes will be enough to remedy it. The event that affected the bZx attack.

  7. Flesh freaking loans: the event that affected the Fulcrum attack

  8. Poor liquidity and bad auction: a too rapid price fall and low collateral demand would trigger a greater loss than the penalty provided for by the protocol.

DeFi are still in the experimental phase and, despite the great enthusiasm, the risks are many. 

Improving the ecosystem is possible but how? MakerDAO recommends: 

  1. Participating in the governance of MakerDAO using MKR tokens to vote.

  2. Creating MKR pools to mitigate the power of whales. Put together small MKR holders to influence voting mechanisms.

Mario Conti likes to turn to developers by saying:

“Fix, don’t fork…. Or Fork, i’m not your boss! If you fork, I will try to learn from what you do to incorporate it into the Maker protocol”.

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Lorenzo Dalvit

Blockchain enthusiast tutor, expert in sales and marketing, social community manager, artistic director, musician, lover of disruptive paradigms and life. All my skill are about human interaction and connection

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