Issues With (At Least) Ethereum-Based DeFi

Over the past few months, the so-called “decentralized finance (DeFi)” market on Ethereum (ETH) has absolutely exploded.

For those unaware, the idea is that to enable full freedom from the fiat system, there should be decentralized applications built on blockchains for financial applications — be that loans, investing, and so on and so forth.

There’s one overarching problem, however: privacy. People want decentralization but they also want privacy. However, with the current blockchain system right now, the data of transactions and the smart contracts can be leaked, made available for anyone that has the resources to look. As Chainlink wrote in a recent white paper:

Smart contracts naively implementing financial instruments on blockchains (permissionless or permissioned) can leak critical business intelligence: Monetary amounts, instrument terms, and participating counterparties. In today’s complex capital and derivatives markets, privacy is both a given and a legal requirement of most contracts.

To make this statement a bit more tangible, here’s an example: If you get enough data on a blockchain, you can find how much a certain account/user is getting a loan for, and at what interest rate. Can that happen in the world of traditional finance? No, not really.

Of course, this is only one example of how DeFi can be seen as a downside for those looking for financial privacy, as there are many other cases in which an open blockchain model may actually hamper secrecy.

Meet Mixicles

But, solutions are being created. Just recently the Ethereum-centric Chainlink just unveiled what it calls “Mixicles” in the aforementioned white paper. Mixicles, according to Chainlink, are DeFi instruments that are embedded with oracles to promote privacy.

We’re thrilled to release our work on Mixicles, a new approach to enabling privacy for smart contracts with an initial focus on decentralized finance. Mixicles allow #DeFi smart contracts to achieve a new level of privacy, giving them much wider usability https://t.co/Le8FIB2eDy pic.twitter.com/9eZNSQxdbd — Chainlink – Official Channel (@chainlink) September 3, 2019

To be honest, the information contained in the paper is much more complex than this writer can handle. But, this idea is that decentralized finance applications can combine the use of oracles — which intermediate data between the off-chain and on-chain worlds — and mixers/tumblers to create a solution that preserves the privacy of financial instruments.

As DeFi becomes more and more popular with time, users will demand privacy — it just makes sense.

Chainlink Sees Strong Fundamentals

This is the latest in a string of positive news for the project. Per previous reports from Ethereum World News, Callisto Network, a platform derived from Ethereum’s technologies, has integrated Chainlink’s Oracles into Callisto-based applications.

Prior to this, Coinbase Pro listed LINK against the U.S. Dollar and Ethereum; Coinbase Custody also commenced support for the cryptocurrency, giving institutional investors more an incentive to invest in and use the project.

Photo by Fabian Blank on Unsplash