If the sheer number of smart contract hacks netting attackers over $3 billion in 2022 has taught us anything, it’s that decentralized finance (DeFi) is still an immature industry.
In addition to exploits, DeFi still faces issues of scale related to the computational power needed to drive complex transactions and the throughput needed to support the global financial system for years to come.
As the current king of DeFi, it is worth evaluating the Ethereum network to identify the issues and limitations that are contributing to the industry’s current hurdles.
At Consensus 2023, CryptoPotato sat down with Piers Ridyard, CEO of RDX Works, to discuss the ways in which Ethereum is not truly optimized for DeFi. He explained some of the most suitable technologies underlying modern blockchains, including the recently popular Radix smart contract platform.
Ethereum’s clunky programming language
According to Ridyard, DeFi in crypto is currently lacking in three main areas: user experience, developer experience, and scalability.
The first two problems stem largely from less-than-ideal programming languages for developers to express their ideas for particular financial applications. One of those languages, he said, is Ethereum Solidity.
“Sturdiness is like banging your head against a brick wall,” he said. “If you want to build assets that are highly secure, and you want to build financial applications that are highly secure, it’s basically impossible to make it secure in a way that’s easy for developers to use.”
Ridyard’s company, RDX Works, is a core developer of Radix, a DeFi-focused blockchain whose native token, XRD, grew more than 200% from early to mid-April.
Unlike Ethereum and other chains, Radix uses a unique programming language called Scrypto, which is specifically focused on making financial applications easier to build and use.
Beneath Scrypto is the Radix engine, which includes primitive elements that are part of the ledger itself, providing the essential building blocks for developers to build applications without having to start complex development from scratch.
“You’re not creating your own smart contract that then defines what it means to be a token, what it means to be a token transfer and balance tracking,” Ridyard said. “All of that is done by the ledger itself.”
The Radix engine also protects applications on the platform from “re-entry attacks,” a common DeFi loophole that allows a hacker to continually back out of a smart contract until the victim files for bankruptcy. Specifically, the engine prevents infinite callbacks that lead to recursive loops that allow hackers to flush a contract to zero.
In February, the DeFi protocol dforce lost $3.6 million for such a mistake. “A lot of hacks worth maybe half a billion dollars that just got re-entry go away just because of the way we implemented the architecture,” Ridyard said.
Ethereum Consensus Mechanism
from Ethereum “BindThe upgrade in September, which changed its consensus mechanism from proof-of-work to proof-of-stake, was widely hailed as the greatest technical feat in cryptocurrency history. However, in 2023, even proof-of-stake may prove to be a less advanced mechanism than what newer chains can offer, especially on the scalability front.
For example, Ethereum does not allow parallel execution of transactions which would allow for massive throughput. All transactions must be ordered, even if they are not related to each other.
In contrast, Radix uses the “Cerberus” consensus mechanism, which avoids the need to place orders. “They can start and finish whenever they need to start and finish, and you don’t have to agree with each other about which one came first and which one came second,” Ridyard said.
Radix still comes integrated with a delegated proof-of-stake system that protects Cerberus. However, Ridyard does not consider proof-of-work or proof-of-stake to be “consensus mechanisms”, but rather “civil protection mechanisms”.
“A consensus mechanism is how the nodes agree. The civil mechanism is about how you defend those nodes from being maliciously attacked in the process of reaching an agreement,” he explained.
Ridyard said he admired proof-of-stake for its energy efficiency, but noted that proof-of-work chains, like Bitcoin, solve certain “bootstrap” and “randomization” problems.
DeFi and the SEC
In addition to technological limitations, DeFi and the blockchains that support it are currently under immense regulatory pressure from the Securities and Exchange Commission (SEC). The agency currently seeks to regulate DeFi exchanges under existing securities exchange laws.
While Ridyard sees the possibility of regulators “killing” DeFi in the United States for a period, he does not envision the industry dying globally due to the overwhelming benefit it can bring to certain economies. Ultimately, he believes that “reading the tea leaves” of how regulators will interpret certain compliance rules is a bit of a distraction, and that DeFi will eventually adapt to better suit the political and economic will of each country.
“What the regulators are trying to do is find the handles on which they can enforce against what the government and more generally what the voting public might consider to be the things they want and don’t want,” he said. “There’s going to be some give and take.”
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