Is open finance really open enough? This article sorts out the degree of decentralization of mainstream DeFi projects
Editor's Note: This article comes fromorange bookEditor's Note: This article comes fromhackernoon。
orange book
This article sorts out the degree of decentralization of each protocol through the introduction of the main DeFi lending protocols. The analysis is based on facts. Although there is a little "self-selling and boasting" of bZx, it is still worth reading. It is a rare article that compares and analyzes the openness of Defi projects from the perspective of financial technology.
There is a saying that judging the degree of decentralization of a certain Defi product only needs to look at its most centralized part, but since the concept of "decentralization" is a continuum and will be affected by many factors, so we Try to analyze from different dimensions.
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Decentralized Lending Protocol
The common components among all DeFi lending agreements include whether there is centralized institutional custody, source of currency price information, who initiates the margin call, who provides the liquidity of the margin call, the form of determining the interest rate, and whether it is centralized The six aspects of protocol development and update are carried out in the form of protocol development. This classification system, while simple, is very meaningful in terms of capturing the degree of control the team behind the protocol has over the assets it holds.
First of all, let’s explain the 6 levels of Defi lending products: (You can also see the brief table below)
CeFi: CeFi products are hosted, and the centralized organization approves margin calls and provides liquidity, and the source of currency price information, determination of interest rates, and platform development and updates are all centralized. Typical examples include SALT, BlockFi, Nexo, and Celsius.
Level 1 DeFi: These DeFi products are non-custodial, and centralized institutions approve margin calls and provide liquidity, and the source of currency price information, determination of interest rates, and platform development and updates are all centralized. Such as Dharma.
Level 2 DeFi: These DeFi products are non-custodial, with an additional decentralized component attached, which may be a source of currency price information, margin calls, margin liquidity, interest rate determination, or platform development updates, but the rest remains centralized of. Examples include Expo, Nuo, and ETHLend.
Level 3 DeFi: These DeFi products are non-custodial and do not require a centralized institution to approve margin calls, but the source of currency price information, determination of interest rates, and platform development and updates are all centralized. Such as Compound, MakerDAO.
Level 5 DeFi: These DeFi products are non-custodial, do not need to approve margin calls, and can provide margin call liquidity without authorization. The source of currency price information and the determination of interest rates are all decentralized. However, the development and update of the platform is controlled by a centralized method. A typical example is bZx.
Level 6 DeFi: Every component in these DeFi protocols, including protocol development and updates, is decentralized. There are currently no such examples because there is no fully decentralized DeFi protocol.
Dharma
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2. Examples
Dharma uses the open source lending smart contract mentioned in the white paper, with a Dharma-controlled address as the "guarantor". The smart contract sends the borrower's collateral to the guarantee contract, which holds the borrower's funds in custody for the life of the loan.
Dharma's loan origination process involves closed-source contract code. When a borrower or lender sends assets to a provided address to initiate a Dharma loan, the smart contract in the receiving address interacts with a monitoring script located on Dharma's central server. If the monitoring process goes down, or if the correct gas price is not used when redirecting funds, the transfer of assets will be stuck until the transaction is resubmitted.
This step is currently done by the Dharma team. While this may allow Dharma users to temporarily lose control of their funds, as their assets may be waiting in the smart contract system to be processed, the Dharma team cannot steal funds because they do not have access to the users' private keys.
Margin call: Dharma centrally monitors positions, centrally initiates margin calls, and provides liquidity by the central liquidity pool.
Source of currency price information: Prices are calculated by Dharma.
Interest rates: Dharma offers fixed-term loans with fixed rates, and lender deposits will only earn interest as the borrower uses the asset. Currently, platform operators subsidize lenders and borrowers, so it still looks like a lucrative business.
NUO
Protocol development updates: The development of Dharma's core contracts and guarantee contracts depends on Dharma itself. The guarantee contract is open source, and the loan origination contract is closed source.
Note: Dharma recently revealed that it plans to move to a MakerDAO-style liquidation mechanism. This will greatly reduce the degree of centralization.
Escrow: Nuo Contracts are open source, non-custodial contracts.
Margin Call Initiation: Nuo centrally monitors off-exchange margin positions and issues margin calls to its contracts when positions are on margin maintenance. Liquidation will only be executed when the price feed confirms that the position is on margin maintenance. Only Nuo's whitelisted addresses can be called in the contract to initiate a margin call, so the whole process is less decentralized.
Margin call liquidity: Nuo gets margin call liquidity from Kyber and Uniswap (both decentralized exchanges), making it more decentralized.
Source of currency price information: By integrating price information from Binance, Coinbase and Kyber, Nuo can prevent premature liquidation and price manipulation to a certain extent.
Expo
Interest rates: Nuo uses an algorithmic interest rate. While rates are determined by supply and demand, Nuo controls the fundamental parameters and is able to effectively set rates.
Protocol development update: Nuo is currently being developed centrally by the team. All contracts are open source and mutable with no time locks.
Escrow: Expo contracts are open source and non-custodial.
Initiate a margin call: Expo centrally monitors margin positions and issues a margin call to its contract when the position is on margin maintenance. Only the whitelist address of dYdX can be called into the contract to initiate a margin call, which is a more centralized point.
Margin Call Liquidity: Expo contracts will use a Dutch auction when a margin call is initiated. Currently, Expo mainly uses RadarRelay and ETH2DAI to provide liquidity during the Dutch auction. Generally speaking, anyone can participate in providing liquidity, but unfortunately due to the lack of intuitive interface, almost no one participates.
Source of currency price information: The final price is obtained in the form of a Dutch auction, which makes it decentralized.
ETHLend
Interest rate: The Expo interest rate is centrally determined and remains unchanged.
Protocol development updates: The Expo contract is centrally developed and open source. These contracts are largely immutable, but there are many optional upgrades, such as ETH Wrapper proxy contracts and other decentralized exchanges.
Escrow: The ETHLend contract is closed-source and non-custodial.
Initiate Margin Calls: Margin calls are initiated by lenders to prevent premature liquidation of positions via price feeds. The fact that only one party is responsible for initiating margin calls makes the protocol centralized.
Margin Call Liquidity: Lenders are responsible for liquidating positions and receive an 8% discount on collateral as a result. ETHLend charges a fee of 2%, and the source of margin call liquidity is concentrated on the lender.
Compound
Interest rate: The interest rate is freely negotiated between the borrower and the lender. This aspect of the protocol is decentralized.
Protocol Development Update: The ETHLend contract is closed source and partially mutable. The protocol is centrally developed by the team. The core functionality is immutable, but auxiliary functionality can be built on top of it, such as paying off a personal loan.
Escrow: Compound smart contracts are open source and non-custodial.
Margin Call Initiation: Margin Monitoring and Margin Call initiation do not require permission.
Margin Call Liquidity: A 5% discount on any collateral that is liquidated incentivizes investors to monitor, initiate, and provide liquidity for margin calls.
Source of currency price information: Determined by the whitelist addresses controlled by Compound. In order to prevent Compound itself from manipulating the price, the system sets a sensitive parameter, which can control the hourly price change within 10%.
MakerDAO
Interest rates: Currently interest rates are centrally determined. In version 2 of Compound, the same model will initially be deployed, though later there will be a cToken DAO allowing lenders to vote on the interest rate parameters of their respective money market reserves. The cToken DAO method is not as decentralized as the orderbook method, because the orderbook reflects the impact of the entire market on interest rates. Although it is not enough, the degree of decentralization of the cToken DAO method is far more than a model in which the interest rate parameters are determined centrally.
Protocol Development Update: The Compound contract is centrally developed and open source. In the first version of the contract, except for the interest rate logic, the rest is immutable. When updating to the second version, the contract is mutable. The v2 protocol consists of a series of cToken contracts. At the beginning, Compound will control the cToken contract, but later control will be transferred to a cToken DAO, which can change the contract, with a time delay of 48 hours.
Custody: MakerDAO smart contracts are open source and non-custodial.
Margin Call Initiation: Margin Monitoring and Margin Call initiation do not require permission.
Margin Call Liquidity: The provision of liquidity is permissionless, incentivized, and decentralized.
Source of currency price information: The source of MakerDAO’s price information is semi-centralized, voted by MKR holders, and determined by a coalition composed of a series of addresses finally selected. The coalition's manipulation of prices can be controlled by setting a sensitive parameter that prevents updates from exceeding bounds. We can see that MakerDAO is very similar to Compound in this respect, but MakerDAO is more decentralized than Compound in obtaining price information.
Fulcrum
Interest rate: It is called "stability fee" in the MakerDAO ecosystem. The stability fee is an interest paid by CDP holders. The stability fee is voted on by MKR holders and is a semi-decentralized approach.
Protocol development update: The MakerDAO contract is centrally developed, open source and cannot be tampered with.
Escrow: Fulcrum smart contracts are open source, non-custodial,
Activation of margin calls: Margin monitoring and initiation of margin calls are permissionless, incentivized, and decentralized. Margin callers receive bonuses for successfully executing margin calls.
Margin Call Liquidity: The provision of liquidity is permissionless, incentivized, and decentralized. Liquidity comes from KyberSwap.
Source of currency price information: from KyberSwap. Kyber aggregates currency price information from Uniswap, Biniance, Bitfinex, Huobi, and its internal inventory. In the absence of price updates from reserve governing bodies, Kyber's price remains within a predefined range, reducing the possibility of price manipulation. The source of KyberSwap currency price information is decentralized.
dY/dX
Interest rates: The bZx team controls the interest rate model parameters, allowing efficient central setting of interest rates. However, the team has plans to open the right to set interest rates to token holders in the future to reduce centralized control.
Protocol Development Updates: The Fulcrum contract is centrally developed and open-sourced, and core functionality can be modified during a 28-day time-lock period.
Custody: dYdX smart contracts are non-custodial.
Initiate a Margin Call: Anyone can initiate a Margin Call. There is a 5% discount on collateral after liquidation to incentivize users on margin calls.
Margin Call Liquidity: Anyone can provide margin call liquidity.
Sources of currency price information: dYdX uses MakerDAO price feeds for ETH and DAI, but also uses Uniswap and ETH2DAI price feeds to bind updated prices to reduce attacks on feeds. The MakerDAO price feed is semi-centralized, but also not controlled by dYdX. For this reason, we believe dYdX's source of coin price information is decentralized, but not to the same extent as Kyber.
bZx
Interest rate: dYdX centrally controls the interest rate by setting the parameters of the interest rate model.
Protocol development updates: dYdX smart contracts are centrally developed and closed-source. The team reports that the contract will soon be verified on Etherscan.
Escrow: bZx smart contracts are open source and non-custodial.
Initiating a Margin Call: Anyone can initiate a Margin Call.
Margin Call Liquidity: Anyone can provide margin call liquidity through KyberNetwork. In the near future, there will be ways to provide margin call liquidity through 0x or directly from the caller's assets.
Source of currency price information: bZx obtains decentralized currency price information from KyberSwap. Kyber aggregates information from Uniswap, Binance, Bitfinex, Huobi and its internal inventory. In the absence of price updates from reserve governing bodies, Kyber's price remains within a predefined range, reducing the possibility of price manipulation. KyberSwap price feeds are decentralized.
Interest rate: The interest rate is determined by the market through an order book. Since everyone's behavior has an impact on the determination of the interest rate, this is a completely decentralized interest rate determination mechanism.
