Skip to content
WONGCW News

WONGCW News

Protecting Companies from Fraud in the DeFi Space

Protecting Companies from Fraud in the DeFi Space

January 14, 2021 wongcw Comments 0 Comment

Image Source

The rise of alternative financial markets that aren’t tied to any particular government or banking system has led to them being organized differently from what we’d seen beforehand. In essence, we’re entering a new era where financial structures are being operated entirely digitally by a distributed network of players – the DeFi space. 

One of the panelists from The New Normal of Blockchain & Cryptocurrency talks held in late October is Luke Lombe, a person with extensive experience in the blockchain industry and a deep understanding of capital formation and market strategies. 

Mr. Lombe is the founder of Echelon One, a consultancy and advisory firm to a wide range of clients including blockchain startups as well as the co-founder of MYNTD, a capital access firm specializing in digital securities. 

Given his background, Mr. Lombe’s provides insights into the functionalities of the Uniswap DeFi platform and the way companies that would want to participate in this space that can safeguard against bots and fraudulent behavior.

To explain the current state of threats in DeFi, Mr. Lombe made a distinction between the traditional and newly formulated, fully decentralized market exchanges. 

All the well-known traditional exchange markets today – the Nikkei, the NASDAQ, etc. – are centralized markets based on the order book model. In these traditional markets, buyers offer a price for a share and sellers offer to sell an asset at a certain price. The exchange is where these players compromise and meet in the middle. When there is a gap in the market, the market makers close it by minimizing the difference between the buying and asking price. 

In doing so, they are also providing liquidity and generating operational profit for the exchange markets. 

This is the opposite of decentralized exchanges where there is no such central authority pulling the strings, Mr. Lombe explained. In the DeFi space, every crypto transaction is a smart contract entry that requires a gas fee, usually paid in Ethereum. 

What makes decentralized exchanges unattractive to market makers is the fee each transaction requires, which would essentially make them go broke due to the high number of transactions executed every minute. The perfect example of that is Uniswap since it’s based on smart contracts and liquidity pools without the presence of any middlemen. 

It is an exchange where two assets are provided in equal value. Moreover, anyone can provide liquidity – individuals, investors, funds, etc – and by doing that, they get rewarded and incentivized to continue with the process. 

According to Mr. Lombe, this new trading model (via Uniswap DeFi token) has seen an explosion in interest in the last six to nine months with the volume going from $1 million to $1 billion a day. This indicates that the decentralized exchange space is attracting a lot of interest. As a result, Uniswap, for example, recently received investments from some of the world’s biggest VC’s, including Andreessen Horowitz.

However, there are also risks involved with this model as well which may lead to fraud on DeFi. On these decentralized exchanges, there are also bots – computer programs or algorithms – whose purpose is to identify opportunities to be exploited within the smart contracts and trading platforms themselves. 

Quite similar to the traditional equity exchanges, arbitrage bots will find a price on one platform, recognize the difference in the price on another, and then make a trade to exploit the difference and generate profit. Consequently, they would create liquidity in the process and stabilize prices, which is a good side-effect, Mr. Lombe noted. 

He also pointed out another unique aspect of decentralized exchanges like Uniswap. Upon placing a trade order on the platform, and announcing it via the blockchain smart contract, the action is also visible to the bots who are ready to exploit the deal for themselves. 

To protect from fraud, speed is crucial – the quicker you can make the trade, the less time there is for the bots to jump in front of the queue and either buy or sell the tokens or affect the price before you get the chance to buy it. The transaction can be sped up by paying a bit more in gas fee, so it’s a good idea to do that to avoid being exploited by the bots and affecting the trade. 

“If you pay a small fee, your speed of transaction could be several minutes. If you pay a high fee, it could be just a few seconds, 10 seconds or so. That’s where the varying fee is very important.” – Luke LombeClearly, the DeFi space offers plenty of opportunities, but it also comes with its own set of risks. In that sense, it’s crucial to be informed as much as possible about the potential downsides such as these fraudulent behavior instigating and arbitrage bots.

This article originally appeared on aikon.com

Related


Technology

Post navigation

PREVIOUS
Content Marketing for B2B SaaS Companies: Everything You Need to Know
NEXT
The Ultimate Guide to Digital Marketing Proposals

Leave a Reply Cancel reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

More results...

Generic filters
Exact matches only
Search in title
Search in excerpt
Search in content
Filter by Categories
Business
Cryptocurrency
Cyber Security
Entertainment
Featured
Giveaway
Health
Musical instrument
Network
SEO
Social Media
Software
Sports
Technology
WordPress
Content from
Content to
January 2021
M T W T F S S
 123
45678910
11121314151617
18192021222324
25262728293031
« Dec   Feb »

Categories

  • Business
  • Cryptocurrency
  • Cyber Security
  • Entertainment
  • Featured
  • Giveaway
  • Health
  • Musical instrument
  • Network
  • SEO
  • Social Media
  • Software
  • Sports
  • Technology
  • WordPress

Archives

Recent Posts

  • Arkansas Solar: 7 Things You Should Know
  • Overview of  calculator-online:
  • What Is an ALTA Survey? Plus 3 Reasons You Need One
  • Debunking the Most Common Bitcoin Trading Myths That Exist Today
  • Solar panel system: How it works and what are the benefits?
  • All About JPG Images: How to Download, Edit, and More
  • How to Create Engaging Instagram Reels for Your Brand
  • What is Safety of Showering After Taking Ivermectin
  • Weight Loss Tips Using Diet Chart For Your Best Health
  • How to Find the Right Female Escort in the USA for You
© 2023   All Rights Reserved.