Decentralized finance, smart contracts and consensus.

I have previously written about the Wreck of the MakerDao in March, 2020 when Bitcoin dropped 50%, Ethereum dropped 60% and many Collateralized debt positions on the MakerDao were suddenly liquidated in a secondary market, where the Ethereum blockchains lack of surge capacity in terms of transactional volume is widely believed to have led to a non competitive bidding process, where few bids or transactions got through and the high bids were zero buds and the smart contracts sold Ethereum to the highest bidder of sometimes zero.

This fiasco is widely cited as evidence of the poor performance of the Ethereum blockchain due to its low transaction per second capability. And it is the hope of the people I call “The Etheteum Faithful” that Ethereum transition to Proof of Stake from Proof of Work and some other innovations will fix this issue. But for Decentralized Finance this issue also brings to light two other issues that need to be discussed, first the response of the MakerDao community to this fiasco and can we still trust Smart Contracts absolutely, or due they reflect their maker like all human inventions and thus they are flawed, but possess different flaws then their maker, humans.

Consensus
This is a beautiful way to govern and seems very democratic, but we need to only review what happened here to realize it’s limitations. In this March MakerDao scenario most people feel the investors were dealt with unfairly and they should receive compensation. This created a public outcry that the MakerDao reimburse these investors and was a huge public relations fiasco for the MakerDao, but this isn’t a centralized exchange where you can pick up the phone and call the CEO or create a Twitter campaign to force one person to fix the problem. The MakerDao is a DAO a decentralized autonomous organization!and therefore this problem had to be resolved through consensus. Which means disemminationg information, holding meetings like town halls, debating what happened, why it happened and importantly who is to blame and can we get money from them. Eventually after more then a month the DAO made some decisions, but it was a long process and it revealed that decentralization doesn’t deliver the fast decisions we are use to in a centralized world.

Smart Contracts are not Smart
The second thing this revealed is that Smart Contracts are not smart, at least not in the way humans are smart...Yet. Humans are smart and they can think and adapt to changing conditions. Smart Contracts in this instance were not coded to stop selling Ethereum at a certain price, not even the price of zero dollars. Smart Contracts are not smart, but they are unbiased, neutral executors of a deal. They are the backbone of the Trustless part of Decentralized Finance because they don’t choose sides, they just execute the code. Here the code said sell enough Ethereum to cover the shortage, using a competitive bidding process, selling the Ethereum to the highest bidder at an auction. It’s a great solution and both intellectually and in practice it usually provides the desired outcome; the best possible price for the Ethereum.

But here it failed, not because the code was bad, but because the code didn’t account for what many investors in this space consider a predictable problem, failure to execute transactions on the Ethereum blockchain during high transactional volume events or time periods. So is the problem that Smart Contracts aren’t Smart or is the problem the humans who wrote them, and the MakerDao for not making sure that the code and the Smart Contracts were written to deal with problems like this one.

Conclusion
We are living in exciting times, as decentralized finance literally came into being recently and is evolving right before our eyes. Personally, I believe that none of this is bad or good, it just is, decentralized Finance is a new organism, the creators, the managers need to adapt, change and grow in understanding as we proceed down this new pathway...DeFi.

✍🏼✍🏼✍🏼✍🏼by Shortsegments.

Title: Decentralized finance, smart contracts and consensus.