I can hear the cheers OR groans already! Zcoin jumping on the DeFi bandwagon?
This is an often asked question and not easily explained in a chat format so I hope to elaborate my personal thoughts on the topic and how it is shaping our thoughts in the defi space.
What is Defi?
Many purists would argue that being a cryptocurrency is already ‘decentralized finance’. But in the common use of the word in the space, DeFi encompasses things like algorithmic or CDP stablecoins, decentralized exchanges, open lending platforms, prediction markets and many others. It is basically, finance products that are ported over to the blockchain and ideally removes intermediaries in doing so.
Blockonomi makes an excellent article on this.
What’s the hype with DeFi?
The idea of creating an alternate financial system on the blockchain is a powerful narrative. It takes advantage of the fact that cryptocurrencies can be programmable money. The ability to take loans without banks, to trade without KYC on exchanges that doesn’t require market makers or even building synthetics assets.
It also enables all sorts of new things for example “flash loans”, where people without collateral can take loans as long as they are repaid back within the same instruction allowing anyone with the know how to take advantage of arbitrage opportunities without needing access to your own capital.
Also, with the rise of yield farming that allows users to earn tokens for contributing capital to liquidity or ‘staking’ it, has lead to a huge surge in interest in the space. This has been controversial as many yield farms are basically complex money games though some are used to incentivize interest and use in the platform. DeFi yield farming has sometimes been likened to be the new ICO mania where everyone is FOMOing over anything that is DeFi related, and like in any bull market, there is truth in it.
The ability to also have instant listings and liquidity on DEXes like Uniswap have also made it a heaven for anyone to create their own token leading to also many ‘rug pulls’.
Zcoin and DeFi
There are three options we can take when dealing with DeFi:
- Build DeFi functionality directly into Zcoin
- Have nothing to do with DeFi
- Integrate into DeFi
The first option may seem to be appealing especially when coupled with privacy but it faces numerous challenges. To make DeFi work natively on Zcoin, many require smart contract capability which is a whole endeavor on itself. Although the route to fork Qtum is open, it introduces another codebase that we have to maintain and another large attack surface. Diversify too much and you’ll pay for it later. Our focus shouldn’t deviate from making Zcoin the best private cryptocurrency to use which is already a huge task.
The second option is to dismiss DeFi as a fad, and just stay out of it. This is a popular take especially among larger cap projects or those where integration is not trivial (due to non Bitcoin base for e.g.). If DeFi proves itself and they’re large enough, the integrations will come. However, Zcoin isn’t in that position where people will build integrations for us independently. This is a reality as there are so many other larger cap projects with larger user bases that makes sense to be prioritized. This also means that if DeFi takes off, Zcoin will be relegated into its own little siloed ecosystem and having to play catch up.
The third option is to integrate into DeFi which is to build bridges into the DeFi ecosystem so that we can participate in it, but without having to maintain smart contract capability and build all the apps ourselves. There are tradeoffs to this approach in that many of these models mean that there is loss of privacy or involves some sort of federated or centralized trust. However the gains can be great. Improved liquidity even on Znodes, greater utility of XZC, the ability to participate in DEXes where all the users are or to use Zcoin as collateral for decentralized loans. Once they’re done, The important thing is that users are given the choice to choose what they are comfortable with and the set of trade offs that matches their needs.
Zcoin’s strategy falls into the third category.
Over the next month or two, we will be unveiling our initiatives in bridging Zcoin into DeFi. As you already know, we’re part of the Ren Alliance and are working towards integration into RenVM. What this means is that an ERC-20 token version of XZC can work on the Ethereum network and be listed on Uniswap, Balancer and other DEXes. Having a Bitcoin core codebase allows us to do this with relative ease and is one of the strengths of our project.
What’s even more interesting are ways to fractionalize Znodes that would make them liquid while continuing to earn yield. One of the criticisms of Znodes is that they lock liquidity and that they exclude people who can’t afford to hold 1000 XZC. Work is well underway on this and we hope to unveil this soon.
We are also exploring other integrations into other promising smart contract networks, some of which we have already opened conversations with.
But what about Privacy?
Privacy is still the very core of our project. With the upcoming Lelantus launch we are preparing to launch our testnet and also focused on making it easily accessible. Audits are completing and we’re doing the final fixes and tweaks. These DeFi initiatives do not detract from this.
While, these representations of XZC on Ethereum won’t have inbuilt privacy, they can easily be converted trustlessly without KYC back into native XZC which will then enjoy all the privacy features. We see DeFi as a separate ecosystem that you can plug in, do what you need to do with all the utility of an Ethereum token, and then bridge out again into private XZC.
Zcoin’s integration into DeFi is about giving greater utility and visibility to the coin while retaining our core values on our native chain.
We have done research on several possible ways to use Znodes as a way to bridge tokens from other smart contract platforms into a Zcoin tokenization layer. This is not a trivial task as these would require much more complicated setups if we are to achieve a high degree of trustlessness since in this case, other tokens would be wanting to use Zcoin’s privacy features so the threshold for trust is higher. We continue to evaluate various schemes to do this.
We welcome feedback and comments!