Is Decentralized Finance just another trend?

a.shah

13 Oct 2020
Is Decentralized Finance just another trend?

Have you been hearing about Decentralized Finance and wondered what it really is? Why has it become so popular? On our Nextrope blog, we break down the technology to decipher its constituents and understand what makes it tick. We compare it to Centralized Finance (the current status quo) and see how it holds up.

Why fix something not broken – Centralized Finance vs Decentralized Finance?

Humans have always had a centralized authority directing and regulating the way they earn and spend money. The norm is that a central mint prints and distributes money, the central bank lends to other banks who then lend to their customers, and these customers deposit their savings back into the banks. It has worked for hundreds of years. Why then do we feel like we need an alternative? Why is Decentralized Finance (DeFi) trending? The simple answer is that Centralized Finance (CeFi) has always had glaring problems, but most chose to ignore it since there was no other alternative at hand. With the introduction of distributed ledger technology (blockchain), this is no longer the case. Decentralized Finance has finally become a reality, albeit with drawbacks of its own.

Whenever power, especially financial power, is centralized, most people get locked out of the decision-making process. Consequently, only a small portion of the population reap the benefits of the financial system while the rest are charged exorbitant fees, high interest rates and low returns. Even in the US, only 7% of the bottom 80% of society own shares in companies, whereas in other nations, most do not even have access to stock markets. Currently, transferring money outside of the country involves countless middlemen and substantial fees, obtaining a loan is met with walls of red tape and bureaucracy and the interest rates on deposits is often abysmal.

Even the safety factor that was attributed to banks eroded after the 2008 housing bubble. 2008 showed us that when few control all the money, risk accumulates at the center and endangers the entire system. In addition, banks use money in ways that most people don’t understand. In times of emergency, bank runs (many clients withdrawing their money from a bank) can quickly lead to zero cash balances, as seen in places like Argentina, Venezuela and Zimbabwe.

Is it surprising then that Bitcoin was first launched in 2009, a year after the financial crisis? There was a dire need for the first-ever solution to have global peer-to-peer settlements with no intermediaries required so that individuals could keep control over their assets. However, Bitcoin and early cryptocurrencies only decentralized the issuance and storage of money, not access to a broader set of financial instruments.

The infographic below describes a simplistic example of how the ideal decentralized exchange would occur compared to the status quo.

Source: Defi Pubs

Decentralized Finance (DeFi) – the unlikely hero?

On paper, Decentralized Finance (DeFi) is disruption defined, allowing individuals full control and access over their assets. DeFi is an umbrella term referring to all the financial applications, such as lending, borrowing, exchanging, and investing which occur through decentralized channels and exchanges. The idea is to create an open-source, permissionless, and transparent financial service ecosystem available to everyone via peer-to-peer (P2P) capability, operating without any central authority. DeFi is distinct because it expands the use of blockchain from simple value transfer to more complex financial use cases such as borrowing, insurance etc. The activity in DeFi has increased exponentially in 2020 with total value locked in increasing from $1 Billion to $10 Billion in a span of 4 months.

Source: Defi Pulse

As mentioned previously, DeFi is primarily being used for loans, trading and payments but there are additional use cases such as insurance and investing being developed. The Ethereum blockchain eco-system is the most popular for the development of these applications since it provides increased security, transparency, and growth opportunities. The Ethereum platform functions through ‘smart contracts’ which automatically executes transactions if certain conditions are met, removing the human element from all transactions.

Source: Block Crypto

While more and more people are being drawn to these DeFi applications, it’s hard to say where they’ll go. Much of that depends on who finds them useful and why. Many believe various DeFi projects have the potential to become the next Robinhood (popular online brokerage that enables stock trading at very low fees), drawing in hordes of new users by making financial applications more inclusive and open to those who don’t traditionally have access to such platforms.

DeFi’s not so shining armor

As with any new technology, there are growing pains. Some of the ones hurting DeFi particularly have been highlighted below:

1. Incomplete decentralization - Although protocols are decentralized and based on consensus algorithms, many access points to the system, like exchanges, are still centralized. In addition, many crypto projects are managed through centralized organizations or companies that too often lack transparency or accountability, and do not openly show the development of new parts of the ecosystem.

2. Volatility - Many DeFi applications, such as meme coin YAM, have crashed and burned, sending the market capitalization from $60 million to $0 in 35 minutes. Other DeFi projects, including Hotdog and Pizza, faced the same fate, and many investors lost a lot of money.

3. Security – While there are no humans involved in the smart contract process, humans do create the contracts and that is a major source of errors. Smart contracts are powerful, but they can’t be changed once the rules are baked into the protocol, which often makes bugs permanent and increases risk.

4. Rising Network fees – Network usage is directly correlated with fees and due to the recent popularity of DeFi, the Ethereum fees have sky-rocketed. This has led to a decrease in profitability for DeFi users and is hindering user experience.

Source: Coindesk

5. Risk of Fraud – While smart contracts have no human involvement in its execution, there are humans involved in its coding. This vulnerability leaves the door open for errors and subsequent attacks on the network.

Conclusion

Decentralized Finance is still at its nascent stage and is still trying to find solid ground beneath its legs. Blockchain and cryptocurrency enthusiasts seem to think there is enormous potential and have therefore poured significant sums of money into various DeFi platforms. Given the multiple challenges DeFi currently faces, worse comes to worst, it will at least force the centralized system to become more competitive by introducing changes to their structure.

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Aethir Tokenomics – Case Study

Kajetan Olas

22 Nov 2024
Aethir Tokenomics – Case Study

Authors of the contents are not affiliated to the reviewed project in any way and none of the information presented should be taken as financial advice.

In this article we analyze tokenomics of Aethir - a project providing on-demand cloud compute resources for the AI, Gaming, and virtualized compute sectors.
Aethir aims to aggregate enterprise-grade GPUs from multiple providers into a DePIN (Decentralized Physical Infrastructure Network). Its competitive edge comes from utlizing the GPUs for very specific use-cases, such as low-latency rendering for online games.
Due to decentralized nature of its infrastructure Aethir can meet the demands of online-gaming in any region. This is especially important for some gamer-abundant regions in Asia with underdeveloped cloud infrastructure that causes high latency ("lags").
We will analyze Aethir's tokenomics, give our opinion on what was done well, and provide specific recommendations on how to improve it.

Evaluation Summary

Aethir Tokenomics Structure

The total supply of ATH tokens is capped at 42 billion ATH. This fixed cap provides a predictable supply environment, and the complete emissions schedule is listed here. As of November 2024 there are approximately 5.2 Billion ATH in circulation. In a year from now (November 2025), the circulating supply will almost triple, and will amount to approximately 15 Billion ATH. By November 2028, today's circulating supply will be diluted by around 86%.

From an investor standpoint the rational decision would be to stake their tokens and hope for rewards that will balance the inflation. Currently the estimated APR for 3-year staking is 195% and for 4-year staking APR is 261%. The rewards are paid out weekly. Furthermore, stakers can expect to get additional rewards from partnered AI projects.

Staking Incentives

Rewards are calculated based on the staking duration and staked amount. These factors are equally important and they linearly influence weekly rewards. This means that someone who stakes 100 ATH for 2 weeks will have the same weekly rewards as someone who stakes 200 ATH for 1 week. This mechanism greatly emphasizes long-term holding. That's because holding a token makes sense only if you go for long-term staking. E.g. a whale staking $200k with 1 week lockup. will have the same weekly rewards as person staking $1k with 4 year lockup. Furthermore the ATH staking rewards are fixed and divided among stakers. Therefore Increase of user base is likely to come with decrease in rewards.
We believe the main weak-point of Aethirs staking is the lack of equivalency between rewards paid out to the users and value generated for the protocol as a result of staking.

Token Distribution

The token distribution of $ATH is well designed and comes with long vesting time-frames. 18-month cliff and 36-moths subsequent linear vesting is applied to team's allocation. This is higher than industry standard and is a sign of long-term commitment.

  • Checkers and Compute Providers: 50%
  • Ecosystem: 15%
  • Team: 12.5%
  • Investors: 11.5%
  • Airdrop: 6%
  • Advisors: 5%

Aethir's airdrop is divided into 3 phases to ensure that only loyal users get rewarded. This mechanism is very-well thought and we rate it highly. It fosters high community engagement within the first months of the project and sets the ground for potentially giving more-control to the DAO.

Governance and Community-Led Development

Aethir’s governance model promotes community-led decision-making in a very practical way. Instead of rushing with creation of a DAO for PR and marketing purposes Aethir is trying to make it the right way. They support projects building on their infrastructure and regularly share updates with their community in the most professional manner.

We believe Aethir would benefit from implementing reputation boosted voting. An example of such system is described here. The core assumption is to abandon the simplistic: 1 token = 1 vote and go towards: Votes = tokens * reputation_based_multiplication_factor.

In the attached example, reputation_based_multiplication_factor rises exponentially with the number of standard deviations above norm, with regard to user's rating. For compute compute providers at Aethir, user's rating could be replaced by provider's uptime.

Perspectives for the future

While it's important to analyze aspects such as supply-side tokenomics, or governance, we must keep in mind that 95% of project's success depends on demand-side. In this regard the outlook for Aethir may be very bright. The project declares $36M annual reccuring revenue. Revenue like this is very rare in the web3 space. Many projects are not able to generate any revenue after succesfull ICO event, due to lack fo product-market-fit.

If you're looking to create a robust tokenomics model and go through institutional-grade testing please reach out to contact@nextrope.com. Our team is ready to help you with the token engineering process and ensure your project’s resilience in the long term.

Nextrope Partners with Hacken to Enhance Blockchain Security

Miłosz

21 Nov 2024
Nextrope Partners with Hacken to Enhance Blockchain Security

Nextrope announces a strategic partnership with Hacken, a renowned blockchain security auditor. It marks a significant step in delivering reliable decentralized solutions. After several successful collaborations resulting in flawless smart contract audits, the alliance solidifies the synergy between Nextrope's innovative blockchain development and Hacken's top-tier security auditing services. Together, we aim to set new benchmarks, ensuring that security is an integral part of blockchain technology.

Strengthening Blockchain Security

The partnership aims to fortify the security protocols within blockchain ecosystems. By integrating Hacken's comprehensive security audits with Nextrope's cutting-edge blockchain solutions, we are poised to offer unparalleled security features in our projects.

"Blockchain security should never be an afterthought"

"Our partnership with Hacken underscores our dedication to embedding security at the core of our blockchain solutions. Together, we're building a safer future for the industry."

said Mateusz Mach, CEO of Nextrope

About Nextrope

Nextrope is a forward-thinking blockchain development house specializing in creating innovative solutions for businesses worldwide. With a team of experienced developers and blockchain experts, Nextrope delivers high-quality, scalable, and secure blockchain applications tailored to meet the unique needs of each client.

About Hacken

Hacken is a leading blockchain security auditor known for its rigorous smart contract audits and security assessments. With a mission to make the industry safer, Hacken provides complex security services that help companies identify and mitigate vulnerabilities in their applications.

Looking Ahead

As a joint mission, both Nextrope and Hacken are committed to continuous innovation. We look forward to the exciting opportunities this partnership will bring and are eager to implement a more secure blockchain environment for all.

For more information, please contact:

Nextrope

Hacken

Join us on our journey to deliver top-notch blockchain tech and a safer future for the industry!