I sat down with Alex Alexandrov, CEO and co-founder at Velas to discuss DeFi, AI in blockchain, and what lies ahead for the blockchain industry.
Ishan Pandey: Hi Alex, welcome to our “Behind the Startup” series. Do you think that decentralized finance (DeFi) is here to stay?
Alex Alexandrov: DeFi is attracting innovation and attention from the people. The progress is in the right direction, but many challenges still need to be addressed. The security of smart contracts is a massive problem that developers are facing. Auditing and penetration testing is crucial for survival. Hackers have stolen $100 Million from Defi projects, according to Ciphertrace. The USD value locked in Defi increased dramatically in 2020 while creating possible new money laundering hazards as compromised Defi protocols made up a large portion of cryptocurrency breaches in 2020. The DeFi boom has essentially drawn fraudulent hackers to Defi, culminating in the most Defi hacks over the year to date due to which cybersecurity is key.
Further, DeFi projects need to divest themselves from Ethereum and move on to other public blockchains, which provide higher scalability with lower associated costs. Ignoring the technical challenges, should DeFi - which means ‘decentralization’ - rely on just one public blockchain?
Ishan Pandey: According to you, while developing a DeFi product, what things should developers keep in mind?
Alex Alexandrov: For DeFi to see a viable future, developers must operate with security at the center of everything they do, ensuring that current infrastructure and security frameworks can keep pace with the industry’s rapid speed of development. Moreover, the industry needs to start communicating the dangers of preventing potential consumers from having their life savings vanishing into the digital vortex.
Adapting to the methodology of traditional banks, DeFi startups should spend enough time to carry out comprehensive security audits and code reviews.
In addition to introducing bug bounty schemes to identify vulnerabilities before they result in user damages, initiatives can also be even more transparent regarding their network vulnerabilities by providing open post-mortems to the public so that other network projects may benefit from failures and avoid them from occurring in the future. This kind of openness would help create trust between users and create a more stable path to widespread acceptance.
Ishan Pandey: Can you explain artificial intuition and its use in a blockchain network?
Alex Alexandrov: For sure! At Velas, we have developed a new consensus mechanism that uses AI to optimize the performance of the whole blockchain network. In simple words, each node has an embedded trained model, which is producing the optimal values of the key parameters for the blockchain, based on the data collected from the last epoch.
This algorithm is ensuring that the blockchain network stays secure, resilient, and productive for its participants. The nodes propose parameter values using the global network state data and local nodes state data of the previous epoch for predictions. The recommender algorithm is acting as the objective “guardian” of the network.
For example, the period of the block depends on the network load (TPS). If the network has a tone of transactions per second, the time blocks would be small. If there are no transfers on the network, the block period would be extended for greater security.
Ishan Pandey: Institutions are warming up to digital assets. According to you, what opportunities lie ahead?
Alex Alexandrov: Bitcoin is now a hedging instrument, like gold, to defend investors from financial uncertainties and is increasingly used to catch the spread of arbitration.
Given the tumultuous times of the COVID-19 pandemic, which has increased unemployment rates across the globe, it is likely that institutional buyers are slightly unwilling to spend funds on assets they are not acquainted with owing to the absence of mass media attention of blockchain technology and its services.
However, fund managers appear to be taking the initiative by capitalizing on the strong returns the digital asset class has to provide.
Ishan Pandey: Recently, Value DeFi suffered a $6M flash loan attack. What are your thoughts on flash loan exploits?
Alex Alexandrov: Flash loans are an innovative product of the DeFi ecosystem, but it comes with certain caveats. For example, in the dYdX flash loan controversy, the borrower took out an ether flash loan on dYdX (a lending app). Then the attacker had split the loan and submitted it to two other funding platforms: Compound and Fulcrum.
On Fulcrum (built on the bZx protocol), the intruder used part of the ETH short-term loan against Bitcoin wrapped (WBTC), which implied that Fulcrum now had to buy WBTC. This knowledge was relayed to another DeFi protocol, Kyber, which filled the order on Uniswap, a common Ethereum-based DEX. But, owing to the inadequate supply of Uniswap, the price of WBTC increased dramatically, implying that Fulcrum overpaid the WBTC it bought.
Around the same period, the intruder took out a WBTC Compound loan with the DYdX loan’s remainder. The price pumped, they exchanged the borrowed WBTC to Uniswap and made a good profit. Finally, they repaid their loan from DYdX and pocketed the ETH residual.
It sounds like a lot of effort, and maybe it’s challenging to follow. The bottom line is that the intruder used five separate DeFi protocols to exploit the markets. Incredibly, all this occurred in the period it took to validate the initial flash loan.
The intruder was able to manipulate him into believing that WBTC was worth a lot more than it was and could make a buck. We can see how far attackers go, and due to this, we must proceed with caution.
Ishan Pandey: What are your thoughts on the recent SEC patchwork framework? Do you think it is a blessing in disguise for the cryptocurrency industry?
Alex Alexandrov: The recent SEC patchwork amendment is a massive breakthrough for compliant securities token offerings (STOs). It is going to unleash a new era for security token offerings. The SEC adopted an amendment designed to harmonize and simplify the existing, complicated framework of private offering exemptions-the primary method by which private companies raise capital. The modified rule raises the cap on proceeds to $75 million from $50 million for security offerings sold under Regulation A and $5 million from $1 million for Regulation CF (crowdfunding).
These rules, which put the Jumpstart Our Business Startups (JOBS) Act of 2012 into practice, allow companies to raise funds from the public without registering as a public company.
The amendments establish a new integration framework that provides a general principle-based approach that looks to the particular facts and circumstances.
Thus, overall the SEC amendments to its patchwork framework is a step in the right direction.
Ishan Pandey: What opportunities do you see for the year 2021 as we advance?
Alex Alexandrov: Synthetic digital assets and decentralized lending will get massive media attention in the future. With the bitcoin bull run already garnering media attention and the loosening of SEC regulations, security token offerings are going to see a comeback.
The purpose of this article is to remove informational asymmetry existing today in our digital markets by performing due diligence by asking the right questions and equipping readers with better opinions to make informed decisions. The material does not constitute any investment, financial, or legal advice. Please do your research before investing in any digital assets or tokens, etc. The writer does not have any vested interest in the company. Interviewer - Ishan Pandey