DeFi Storms Shanghai Blockchain Week

Shanghai   Skyline Sunset 0057 scaled

The week-long Shanghai International Blockchain Week attracted top projects and investors to Shanghai to seek crypto money and fame in its 6th year. 

The two main events in the week were the Blockchain Summit organized Wanxiang, one of the earliest backers of Ethereum,  and the Web3 Forum organized by the Web3 foundation. Ethereum founder Vitalik Buterin also serves as the chief scientist of the Wanxiang blockchain labs.

While the world is still in COVID lockdown, China has recovered enough from its early pandemic to host large in-person conferences in Shanghai. Investors, developers, and entrepreneurs outside of China joined through video links. The speakers appeared on the stage on larger-than-life LCD screens, and their words are translated synchronously to Chinese for the live audience. COVID has changed global conference experiences for years to come.

However, COVID’s impact on our world would not be limited to conferences. In Shanghai, there is a distinct feeling that globalization as we know it is over. A new financial system that transends nations, politics, governments and elite institutions is emerging. That is DeFi, a decentralized and permissionless financial system. It is still early and messy. But the technologies behind DeFi is showing great promises.

I have been to the Shanghai Blockchain week every year since 2017 and witnessed the rise of many high profile projects such as Cosmos and Polkadot. In 2020, the trending word is not a specific project, but a class of blockchain applications, DeFi.

Ethereum

Back in 2016, the second Ethereum Devcon was held at the Shanghai Blockchain Week. The infamous Shanghai DDoS attack happened during that meeting, which created 19 million empty accounts on the blockchain and brought down all nodes except for the ones running Parity software. Since then, Ethereum had been a prominent project in every Shanghai Blockchain Week, which Vitalik Buterin keynotes every year.

This year, Vitalik’s keynote focused on both layer 1 and layer 2 solutions for scaling Ethereum. He predicted that blockchains do not have killer apps. Blockchain’s true potential is from many long-tail apps that form a network. DeFi applications on Ethereum is a killer network.

Today, most DeFi applications are built on Ethereum. They work together as a network to deliver value to users. That has made it very difficult to simply “copy” the Ethereum DeFi ecosystem by duplicating its open source software. Let’s take the most famous Ethereum DeFi project, Uniswap, as an example. Uniswap trades ERC-20 tokens that already have established values. Those tokens are generated from other projects in the Ethereum ecosystem, such as on-chain stable coins (e.g., DAI), wrapped tokens from other blockchains (e.g., wrapped BTCs), or governance tokens from other projects. Furthermore, Uniswap users often use wrapped ETHs, lending protocols, and other exchanges to find arbitrage opportunities. To put it simply, the success of Uniswap, and DeFi in general, depends on the network effect of the Ethereum ecosystem.

As a counter example, I have argued that Uniswap’s external dependencies is getting too complex and could adversely affect user experience.

However, the dark clouds over Ethereum DeFi are Ethereum’s performance, scalability, and developer productivity / security issues. While Ethereum 2.0 is just around the corner, it could be years before Ethereum 2.0 can run any DeFi smart contracts. That’s why Vitalik promoted layer 2 solutions in his keynote. But other than simplistic Uniswap-like demos that do not synchronize with the mainnet, I have not seen useful DeFi applications on the layer 2.

Web3 Foundation Ecosystem

The long wait for Ethereum 2.0 opens an opportunity for alternative networks. The Polkadot network, founded by Ethereum co-founder Dr. Gavin Wood, is a leading candidate. The Polkadot network is managed by the Web3 Foundation, which has a built up an ecosystem of parachains and applications for DeFi.

The Web3 foundation has a big presence in this year’s Shanghai Blockchain Week. The two-day Web3 Forum at the end of the week showcased some interesting web3 ecosystem projects from China and beyond.

Darwinia

Darwinia, an open cross-chain bridge protocol based on Substrate, launched on 26th September. It aims to bridge Ethereum-based DeFi assets into the Polkadot ecosystem. According to Bree Yin, the CMO of Darwinia Network, the main applications on Darwinia would be Defi, NFT, and  blockchain based games. 

Moonbeam

Moonbeam aims to be an Ethereum-compatible smart contract Parachain on Polkadot. Developers can deploy Solidity-based  Ethreum smart contracts on Moonbeam with minimal changes. It bridges DeFi software from Ethereum to Polkadot.

Bifrost

Bifrost aims to become a Polkadot Parachain for staking liquidity. It takes advantage of a unique feature of Polkadot: DOT token holders need to lock and stake their tokens in order to participate in Parachain slot auctions. The Bifrost will launch a vToken (Staking Derivatives Voucher Token) and support the exchange between staked DOT tokens and vToken for liquidity and staking rewards through the Bifrost protocol.

Acala

Acala is a decentralized finance hub and stable coin platform based on Substrate. Fuyao Jiang, co-founder of Acala, shared his opinions on the future of DeFi in a panel at the Shanghai Blockchain week. Acala is not compatible with Ethereum, meaning that developers need to rewrite DeFi software for Acala and forgo the network effects already in place in the Ethereum ecosystem. However, the selling point is that Acala’s underlying infrastructure of Substrate is much more performant than the current Ethereum, and thus providing better user experience for DeFi applications.

Patract Hub

Patract Hub creates a series of developer tools for Substrate’s Ink! WebAssembly virtual machine. It aims to develop Substrate counterparts for Remix, Truffle, Ganache, and others. Developer tooling is crucial for the success of the Ethereum application ecosystem, and Patract Hub intends to become the developer Hub for Substrate smart contracts.

ParaState

Ethereum smart contracts are compiled and deployed on the Ethereum Virtual Machine (EVM), while Substrate and Polkadot’s “native” smart contracts are compiled and deployed on the WebAssembly VM (e.g., Ink!). WebAssembly is generally considered to be superior than the EVM in terms of performance, safety, and industry support. However, re-writing Ethereum DeFi software to WebAssembly means to give up the ecosystem and network effects already in place on Ethereum.

ParaState provides a solution to bridge the gap between the EVM and WebAssembly by supporting the Ethereum flavored WebAssembly (Ewasm) standard developed by the Ethereum Foundation. It aims to be an ETH2 compatible solution for Polkadot.

Oasis and Privacy-First DeFi

One of the greatest advantages of regulated financial exchanges is the guarantee of privacy. It is illegal for the exchange to front-run or profit from customers’ trading intentions. In the crypto space, centralized exchanges claim to voluntarily protect the financial privacy of its customers, but they are almost universally distrusted. 

DeFi projects are in a better position to protect privacy as they remove the profit motivations of the project developers. However, the current blockchain infrastructure provides no privacy protection of on-chain transactions. As several recent “dark forest” attacks had demonstrated, it is easy for robots and bad actors to front run DeFi transactions. To protect privacy in DeFi, we need new infrastructure that is designed from group up to be privacy-first. The Oasis network, led by world renowned privacy computing expert Dr. Dawn Song, is a leading contender for privacy-first DeFi.

In the Shanghai Blockchain Week, Oasis network is prominently featured as it launches its mainnet. The Oasis Ethereum ParaTime is an Ethereum compatible runtime for the Oasis network. It aims to support confidential smart contracts that only requires minor changes from Ethereum. Oasis has already demonstrated Uniswap on its network, and announced a partnership with Balancer. Throughout the week, Oasis announced a successful conclusion of its Ethereum hackathon with over 3000 smart contracts and 700 decentralized web apps, the launch of a new privacy computing hackathon with Gitcoin, and the staking award program with CoinList.

DeFi in China

While there is tremendous enthusiasm for DeFi in the Shanghai Blockchain Week, it is also widely recognized that very few influential DeFi projects are based in China. The most promoted China project in the week is the launch of the Blockchain Service Network (BSN), which is a consortium blockchain project without any cryptocurrency. The BSN promises interoperability with public blockchains such as Ethereum and Polkadot, but bans any cryptocurrency use. The BSN’s main use cases appear to be government record keeping, as opposed to financial applications. 

At the same time, the recent security and political incidents with big centralized exchanges in China have convinced many the need for DeFi infrastructure for Chinese crypto users. We look forward to innovations in this area from Chinese developers!

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