DeFi: Key Innovation in Crypto
Anatoly Yakovenko, co-founder of Solana (SOL) views decentralized finance (DeFi) as the most significant crypto innovation. Yakovenko emphasized DeFi’s importance in improving the financial world.
The Challenge of DeFi Adoption
Yakovenko acknowledged the resistance to shift to software-driven DeFi applications in the finance sector. Despite the hurdles, he believes that the transition is inevitable, predicting complete transformation within 20 to 50 years.
Impact of DeFi
Yakovenko predicts that DeFi will affect the profits of financial giants such as Goldman Sachs and BlackRock. He views this as a natural consequence of innovative disruptions in the industry.
Solana’s Role in DeFi Growth
Solana, initially designed to be ideal for DeFi applications, faced challenges but continued to develop self-solutions. The approach now positions Solana for significant growth.
Ethereum Serving as a Layer 2 Solution for Solana
On 2 July 2023, Yakovenko explored the concept of Ethereum serving as a Layer 2 (L2) solution for Solana. He suggested that in such a framework, those holding Solana assets on Ethereum would have the assurance of finality, meaning they could return to Solana even amid potential issues like Ethereum’s double-spending or creating invalid state transitions.
Structured Three-Step Process
Yakovenko proposed a structured three-step process to operationalize this concept:
- Input all Ethereum transactions into the Solana network.
- Lodge a Simplified Payment Verification (SPV) root reflecting the state after these transactions.
- Set up a bridge timeout feature to allow for the demonstration of any faults.
He also pointed out possible pitfalls in this system. These include discrepancies in SPVs for the root, errors in computing the root (which could be verified using Neon Labs’ Ethereum Virtual Machine), and risks of censorship. To mitigate censorship risks, a dedicated relayer would be required to guarantee that transactions initiated on Solana are successfully processed on Ethereum.
Cautionary Note
While holding Solana assets on Ethereum would be secure, leveraging them as loan collateral or for position holdings would not be advisable. This is due to the possibility of a fault in Ethereum leading to a divergence between the Ethereum state on Solana and the prevailing Ethereum social consensus fork. In such circumstances, Solana users could recover their assets, but their Ethereum representations might lose all value.
Yakovenko’s Observations for Trading
Regarding trading mechanisms, Yakovenko noted that central limit order books (CLOBs) could function well under this arrangement. However, Automated Market Makers (AMMs) and non-flash loan borrowing lending protocols would not be suitable.
Ethereum’s Dysfunctionality
If Ethereum were to experience a censorship fault, the Solana state root on Ethereum would lose its value. Consequently, transaction postings might escalate Ethereum’s gas fees indefinitely, signaling Ethereum’s dysfunctionality.
Hot Take
Limitations of DeFi Adoption
While Yakovenko’s insights on the critical role of DeFi and its impact on the financial world are compelling, the potential challenges and pitfalls in its adoption are noteworthy. The significant hurdles in transitioning to software-driven, decentralized applications in finance, along with the risks of divergences between assets, depict the complexity of embracing DeFi. To fully realize the potential of innovative disruptions with DeFi, coordination and mitigation of risks are paramount in navigating the changing landscape of the financial industry.
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