By Sid Coelho-Prabhu

Cryptocurrency’s promise is to make money and payments universally accessible– to anyone, no matter where they are in the world.

The Decentralized Finance (DeFi) or Open Finance movement takes that promise a step further. Imagine a global, open alternative to every financial service you use today?—?savings, loans, trading, insurance and more?—?accessible to anyone in the world with a smartphone and internet connection.

This is now possible on smart contract blockchains, like Ethereum. “Smart contracts” are programs running on the blockchain that can execute automatically when certain conditions are met. These smart contracts enable developers to build far more sophisticated functionality than simply sending and receiving cryptocurrency. These programs are what we now call decentralized apps, or dapps.

You can think of a dapp as an app that is built on decentralized technology, rather than being built and controlled by a single, centralized entity or company. (Get used to this word, dapp, you’ll be seeing it a lot from here on out.)

While some of these concepts might sound futuristic–automated loans negotiated directly between two strangers in different parts of the world, without a bank in the middle– many of these dapps are already live today. There are DeFi dapps that allow you to create stablecoins (cryptocurrency whose value is pegged to the US dollar), lend out money and earn interest on your crypto, take out a loan, exchange one asset for another, go long or short assets, and implement automated, advanced investment strategies.

What differentiates these DeFi dapps from their traditional bank or Wall Street counterparts?

• At their core, the operations of these businesses are not managed by an institution and its employees?—?instead the rules are written in code (or smart contract, as mentioned above). Once the smart contract is deployed to the blockchain, DeFi dapps can run themselves with little to no human intervention (although in practice developers often do maintain the dapps with upgrades or bug fixes).
• The code is transparent on the blockchain for anyone to audit. This builds a different kind of trust with users, because anyone has the opportunity to understand the contract’s functionality or find bugs. All transaction activity is also public for anyone to view. While this may raise privacy questions, transactions are pseudonymous by default, i.e. not tied directly to your real-life identity.
• Dapps are designed to be global from day one?—?Whether you’re in Texas or Tanzania, you have access to the same DeFi services and networks. Of course, local regulations may apply but, technically speaking, most DeFi apps are available to anyone with an internet connection.
• “Permissionless” to create, “permissionless” to participate?—?anyone can create DeFi apps, and anyone can use them. Unlike finance today, there are no gatekeepers or accounts with lengthy forms. Users interact directly with the smart contracts from their crypto wallets.
• Flexible user experience?—?don’t like the interface to a certain dapp? No problem?—?you can use a third party interface, or build your own. Smart contracts are like an open API that anyone can build an app for.
• Interoperable?—?new DeFi applications can be built or composed by combining other DeFi products like Lego pieces?—?e.g. stablecoins, decentralized exchanges, and prediction markets can be combined to form entirely new products.

DeFi is now one of the fastest growing sectors in crypto. Industry observers measure traction with a unique new metric?—?“ETH locked in DeFi”. At the time of writing, users have deposited over $600 million worth of crypto into these smart contracts.

Intrigued? Let’s take a closer look at just a few of the popular DeFi dapps out there that you can try today. You’ll need a cryptocurrency wallet with a built-in dapp browser (like Coinbase Wallet) to connect to these dapps. You can also use most of these dapps on desktop by selecting the Coinbase Wallet option and scanning a QR code.

It’s still early days for dapps, so DeFi users should do their research on new products and services. Like any computer code, smart contracts can be vulnerable to both unintended programming mistakes and malicious hacks.

Stablecoin and Decentralized Reserve Bank: MakerDAO

Maker is a stablecoin project where each stablecoin (called DAI) is pegged to the US Dollar and is backed by collateral in the form of crypto. Stablecoins offer the programmability of crypto without the downside of volatility that you see with “traditional” cryptocurrencies like Bitcoin or Ethereum.

You can try creating your own DAI stablecoin on the Maker Oasis dapp. Maker is more than just a stablecoin project, though–it aspires to be a decentralized reserve bank. People who hold a separate but related token, MKR, can vote on important decisions like the Stability Fee (similar to how the Federal Reserve’s Federal Open Market Committee votes on the Fed Funds rate).

Another stablecoin with a different architecture is USD Coin (USDC), where every USDC token is backed by one US dollar held in an audited bank account.

Borrow and Lend: Compound

Compound is a blockchain-based borrowing and lending dapp?—?you can lend your crypto out and earn interest on it. Or maybe you need some money to pay the rent or buy groceries, but your funds are tied up in your crypto investments? You can deposit your crypto to the Compound smart contract as collateral, and borrow against it. The Compound contract automatically matches borrowers and lenders, and adjusts interest rates dynamically based on supply and demand.

Other popular borrow/lend dapps are Dharma and dYdX. Aggregators like LoanScan track borrow/lend interest rates across the various dapps, so you can shop around for the best rates.

Automated Token Exchange: Uniswap

Uniswap is a cryptocurrency exchange run entirely on smart contracts, letting you trade popular tokens directly from your wallet. This is different from an exchange like Coinbase, which stores your crypto for you and holds your private keys for safekeeping. Uniswap uses an innovative mechanism known as Automated Market Making to automatically settle trades near the market price. In addition to trading, any user can become a liquidity provider, by supplying crypto to the Uniswap contract and earning a share of the exchange fees. This is called “pooling”.

Other popular Decentralized Exchange platforms (DEXes) include 0x, AirSwap, Bancor, Kyber, IDEX, Paradex and Radar Relay. All have slightly different architectures.

Prediction Markets: Augur

Augur is a decentralized prediction market protocol. With Augur, you can vote on the outcome of events, except you put ‘skin in the game’ by attaching a value to your vote. Prediction market platforms like Augur and Guesser are nascent, but offer a view into a future where users can make better predictions by tapping into the wisdom of the crowd.

Synthetic Assets: Synthetix

Synthetix is a platform that lets users create and exchange synthetic versions of assets like gold, silver, cryptocurrencies and traditional currencies like the Euro. The synthetic assets are backed by excess collateral locked into the Synthetix contracts.

No-loss savings games: PoolTogether

The composability of DeFi lends itself to infinite new possibilities. PoolTogether is a no-loss game where participants deposit the DAI stablecoin into a common pot. At the end of each month, one lucky participant wins all the interest earned, and everyone gets their initial deposits back.

So what’s next for DeFi?

Money and finance have been around in one form or the other since the dawn of human civilization. Crypto is just the latest digital avatar. In upcoming years, we might see every financial service that we use in today’s fiat system being rebuilt for the crypto ecosystem. We’ve already seen asset issuance and exchange, borrowing, lending, custody, and derivatives built for crypto. What’s next?

The first generation of DeFi dapps rely heavily on collateral as a safeguard. That is, you need to already own crypto and provide it as collateral in order to borrow more crypto. More traditional unsecured borrowing and lending will need to rely on an identity system, so that borrowers can build up credit and increase their borrowing power, much like today’s SSN and FICO scores. Unlike today’s identity and credit systems however, a decentralized identity will have to be both universal and privacy-preserving.

We’re also seeing innovation in the insurance space. Many of today’s DeFi loans are overcollateralized (meaning that loans seem inherently safe because of the generous cushion of assets held in reserve). But the black swan for DeFi is smart contract vulnerabilities. If a hacker finds and exploits a bug in the open source code for a dapp, millions of dollars could be drained in an instant. Teams like Nexus Mutual are building decentralized insurance that would make users whole in the event of smart contract hacks.

Another trend we’re seeing is better user experience. The first generation of dapps was built by blockchain enthusiasts for blockchain enthusiasts. These dapps did a great job of demonstrating exciting new DeFi possibilities, but the usability left something to be desired. The latest iterations of DeFi apps are prioritizing design and ease of use in order to take open finance to a wider audience.

In the future, we expect that crypto wallets will be the portal to all your digital asset activity, just like an internet browser today is your portal to the world’s news and information. Imagine a dashboard that shows you not just what assets you own, but how much you have locked up in different open finance protocols–loans, pools, and insurance contracts.

Across the DeFi ecosystem, we’re also seeing a move towards decentralizing governance and decision-making. Despite the word “decentralized” in DeFi, many projects today have master keys for the developers to shut down or disable dapps. This was done to allow for easy upgrades and provide an emergency shutoff valve in case of buggy code. However, as the code becomes more battle-tested, we expect developers will give up these backdoor switches. The DeFi community is experimenting with ways to allow stakeholders to vote on decisions, including through the use of blockchain-based Decentralized Autonomous Organizations (DAOs).

Something magical is happening in the open financial system?—?crypto is bringing money online, and we’re seeing a quantum leap in what’s possible when it comes to the functionality of money. It’s a rare opportunity to see an entirely new industry blossom from scratch. The DeFi space will at first play catch up with today’s financial services industry. But over time, it’s hard to even fathom what innovations will come about when the power to build financial services is democratized to anyone who can write code.

More resources

If you’d like to dive deeper into the DeFi rabbithole, here’s a list of resources you might find helpful

• DeFi Pulse
• DeFi Prime
• Introducing USDC
• Stablecoin Stats
• Decentralized Lending

Help us build an open financial system

If you’re inspired by the potential of a new financial system that serves everyone, everywhere, get in touch. We’re hiring!

Disclaimer: Coinbase does not endorse or promote any of the projects or cryptocurrencies mentioned in this blogpost. Any descriptions of functionality and services provided are for information only. Coinbase is not responsible for any loss of funds or other damages caused as a result of using the projects described above.

This website contains links to third-party websites or other content for information purposes only (“Third-Party Sites”). The Third-Party Sites are not under the control of Coinbase, Inc., and its affiliates (“Coinbase”), and Coinbase is not responsible for the content of any Third-Party Site, including without limitation any link contained in a Third-Party Site, or any changes or updates to a Third-Party Site. Coinbase is not responsible for webcasting or any other form of transmission received from any Third-Party Site. Coinbase is providing these links to you only as a convenience, and the inclusion of any link does not imply endorsement, approval or recommendation by Coinbase of the site or any association with its operators.

All images provided herein are by Coinbase.

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A Beginner’s Guide to Decentralized Finance (DeFi) was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

SOURCE: Ethereum in The Coinbase Blog on Medium – Read entire story here.

By Kenzan Boo

On July 26, 2019, Coinbase Earn launched the Dai Advanced Task. In a few days, users created more CDPs (Collateralized Debt Positions) than ever existed. In the previous 11 months, about 9,000 CDPs were created on the blockchain with MakerDAO. We chose to launch on a Friday. On the weekend after the Dai Advanced Task began, over 10,000 CDPs were created.

In this blog, we explore how one of the biggest decentralized finance apps used Coinbase Earn to help grow its network so quickly. We’ll dive into some of the engineering and product challenges along the way and how we solved them.

Coinbase Earn is a platform that connects the community of users with foundations like MakerDAO. The product allows users to earn cryptocurrencies while learning about them by watching educational videos and doing tasks. It’s a way to help educate crypto purchasers so that they are not just buying a ticker, but also understanding the foundations and networks behind the token.

Earn creates a value for the foundations as well. Foundations want to distribute tokens to its new users. Most new token projects dedicate a major portion of their tokens to initial distribution to circulate among the community. Earn is able to help them expand user participation. The more people that use it, the greater the network effect, and the more meaningful the token becomes.

MakerDAO is one of the most popular decentralized apps in the crypto community. It allows users to use ETH as collateral and create CDP’s in a stablecoin called DAI. DAI is made stable with the help of smart contracts on the Ethereum network, keeping it very closely pegged to the US Dollar.

The effects of the Coinbase Earn campaign have been lasting, even months after the first launch weekend. It’s shown sustained growth for the network far past the initial new user effect. While the lesson has introduced many new people to engaging in blockchain debt positions, it has not yet significantly changed the value of the total debt positions.

Below we’ll go through a few quick screenshots showing a run-through of the task.

Challenges

Current challenges with using decentralized finance apps:

1. Fear of loss
2. Difficult to use

Users of decentralized finance have a fear of losing their initial deposits if they type in the wrong receiving address. Furthermore, many of the current user interfaces are notoriously difficult to use since they’re intended for engineers with technical experience and not consumers.

Fear of loss

Problem: Users’ fear of losing their funds.

As part of the tutorial, a very small amount of ETH was needed as collateral and to pay the network fee.

Solution: Provide the funds needed to complete the lesson.

We supplied collateral by building a backend Ruby controller which directly deposits the necessary ETH into the user’s linked wallet. By giving the user the ETH, the user would not lose their own money. Consequently, if they were not able to complete the tutorial, this would lessen any frustration. The below controller snippet highlights how we sent that allowance to the user’s wallet.

class V1::DaiSendEthController < V1::BaseController

  ETH_ALLOWANCE_AMOUNT = (ENV[‘ETH_ALLOWANCE_AMOUNT’]).to_f

  def dai_send_eth

    begin

      allowance = DaiEthAllowance.create!(

        user_id: current_user.id,

        wallet_address: wallet_address.downcase,

        eth_allowance_amount: ETH_ALLOWANCE_AMOUNT,

        …

     )

     rescue ActiveRecord::RecordNotUnique

     Scrolls.log(

       message: “User #cb_user_uuid already has an Eth allowance associated”

     )

     return head :ok

    end

 SendEthAllowanceJob.perform_async(allowance.id)

 head :ok

 end 

end

Difficult to Use

Problem: Volatile gas prices (network fees).

Gas is a way for Ethereum to self-balance and make sure the network is always available. During high demand times, the cost to do computing on the Ethereum network is raised to incentivize more people to contribute computing power. Most of the time, it costs a few cents to open a Collateralized Debt Position on Maker. However, at rare times of high network use, the cost to create a CDP can go up to $10, which is a lot more than the tutorial funds we provide.

Solution: We check the ETH network for our users.

As part of the Dai Advanced task, we monitor ETH gas prices for our users through an internal backend system we built with our crypto team. The CheckEthGasPrice class below monitors both internal parity price and external Eth Gas Station prices to make sure that the gas prices are within the normal bounds. If we determine that the current gas conditions are too high, we ask the user to come back at a later time to complete the task. We want the user to be able to experience the full flow in the first pass and not have to come back later after they’re halfway through the tutorial. This also helps the Coinbase support staff reduce the number of support tickets coming in.

class CheckEthGasPriceJob < ApplicationJob

 DISABLE_THRESHOLD = ENV.fetch(‘ETH_GAS_COST_THRESHOLD’).to_f

def perform

   gas_station_prices = GasStationApi.prices

   coinbase_parity_price = Ethereum::CoinbaseParityNode.new.gas_price_gwei

   eth_gas_station_price = gas_station_prices[‘average’]

   task_status = DaiTaskEnabled.first

   …

   if coinbase_parity_price > DISABLE_THRESHOLD

     Scrolls.log(

      message: “Gas prices is too high, task disabled”,

     )

     task_status.update(enabled: false) if task_status.enabled

    else

      Scrolls.log(

         message: “Gas prices is acceptable, task enabled”,

      )

      task_status.update(enabled: true) if !task_status.enabled

    end

  end

end

Problem: The Maker UI was not designed for mobile, making it difficult to use.

When we started on this endeavor with the Maker foundation, we were tasked with designing the whole flow end to end to make it easy to use. Upon attempting to create a CDP on the Maker site, it was clear that the page was designed to work well on desktop; however, we anticipated many of our users to go through Earn on mobile. A lot of the modals were cut off or other content not visible on a mobile device.

Solution: We worked closely with the Maker team to revise the Maker app to be mobile-friendly. In the screenshot above, the top set shows the UI before the updates made for Earn and bottom shows after. By working with the Maker team, we were able to iterate and improve on the UI to create a seamless experience for our users. The end result was an easy to use flow for our many mobile users.

Problem: Determining whether a user has successfully created a CDP.

To reward the user for completing the task, we need to first figure out when they’ve completed making a CDP.

module EtherscanApi::CdpCrawler

  DAI_TOKEN_CONTRACT = ‘0x8…’.freeze

  EVENT_SUBSCRIPTIONS = [

       name: ‘dai mint event’, 

       event: ‘mint’,

       contract: DAI_TOKEN_CONTRACT,

       topic0: ‘0x0…’, # mint event

       parser: ‘parse_mint’,

       default_begin_block: 7_491_270 # starting from block when campaign launched

    ,

       name: ‘dai transfer event, Maker proxy’,

       …

     ,

       name: ‘dai transfer event, Instadapp’,

       …

      ,

      …

  ].freeze

end

Solution: Create a crawler that subscribes to all DAI events.
We built a crawler specifically to monitor DAI minting events from particular proxy contracts used by the most popular dApp. When our system sees a DAI mint event, we then try to connect that to our user’s originating wallet address in order to mark the lesson as complete. After that, we reward the user in DAI to their Coinbase wallet.

Conclusion

The DAI Advanced lesson has been a huge success for token development teams and for our community of users. By completing this task, many users directly engaged with a blockchain for the first time.

The DAI advanced lesson campaign has now concluded, however we’ll be working on many more community campaigns like this in the future. If you’d like to help build out the future of the crypto community, come join us.

Check out Earn here: http://coinbase.com/earn

Special thanks to John Granata, Alex Cusack and Max Schorer for working on Earn and editing this blog.

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How MakerDAO doubled its users in a single weekend using Coinbase Earn was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

SOURCE: Ethereum in The Coinbase Blog on Medium – Read entire story here.