why DeFi matters; grand challenges in crypto; table talk
1. Beyond the news: Why DeFi matters, and how
There’s been a lot of news lately around FTX [see our last regulatory roundup], which shows what can happen with centralized, interconnected financial firms that are under-regulated. But for innovators and technologists (as opposed to financial-engineers), one of the most important innovations of crypto — decentralized finance (“DeFi”) — has already solved many of the problems of centralized finance by disintermediating financial services.
DeFi describes the ecosystem of blockchain-enabled products and services that replace (or at least augment) traditional financial intermediaries with open, freely available, autonomous, and transparent software for global, democratized finance. DeFi also includes novel innovations around settlement efficiency, risk management, and accessibility. That’s why there’s been so much interest (not to mention significant traction) in this trend from entrepreneurs, corporate leaders, policymakers, and institutions big and small.
In the past, however, some skeptics dismissed DeFi as an idealistic movement destined to be relegated to “the fringes” of the financial system and internet. But DeFi likely could (and should) become a foundational piece of the financial infrastructure not only for cryptocurrencies, but also potentially for other classes of markets. So what are the features/ benefits of DeFi, and what technically makes it possible? And what needs to be addressed on the road to mainstream adoption?
(1) Read this guest-contributed piece from our archives on “what is DeFi” and why it matters; (2) check out the latest post from Ethereum co-founder Vitalik Buterin on improving safety, proof of solvency, and more for centralized exchanges, as well as his recent tweet on how the DeFi ethos too has risks builders still need to solve for: “bugs in smart contract code”. And then (3) see also our resources:
…on the philosophy of “not your keys, not your crypto” and the “non-custodial” wallet fallacy [also covered in this past newsletter]
…on smart contract security, a useful checklist
…on formal verification; plus notes on DeFi security, in #2 and #3 here
2. Trend/ solution: Zero knowledge for privacy and (not or!) regulatory compliance
Joseph Burleson, Michele Korver, and Dan Boneh; Jai Ramaswamy
For both regulators and users, the goals of (1) reducing the risk of illicit finance (for national security and other reasons); and of (2) preserving the privacy of consumers (especially given transparency in blockchains) are often at odds with each other. Regulators and financial institutions need to know who people are, in order to screen out bad actors. On the other hand, the very act of gathering that information creates a “honeypot” that scammers can hack to get personally identifiable information.
But what if we could resolve this binary either/or choice? That’s where the power of zero-knowledge proofs (which have advanced considerably in recent years) comes in. Zero-knowledge proofs can both protect privacy, and at the same time give compliance officers and others proof of the information they need to verify. Instead of arguing from an ideological position, let’s lay out what’s possible… So in a just-released paper, a16z crypto shares “Privacy-protecting regulatory solutions using zero-knowledge proofs” — covering applicable laws and statutes, and also outlining zkp-based options for regulators and builders to consider.
👂hear also:
this recent-past episode of our podcast, which discusses illicit finance, compliance, and the difference between “obfuscating” vs. “privacy-preserving” technologies
3. Field notes: ACM Conference on Computer and Communications Security 2022
Valeria Nikolaenko
The ACM Conference on Computer and Communications Security (CCS) is the flagship annual conference of the Association for Computing Machinery’s special interest group on Security, Audit, and Control. One of the largest events for the computer and communication-security communities, CCS brings together information security researchers, practitioners, developers, and users from all over the world to explore cutting-edge ideas and results.
As part of our ongoing sharing of field notes as a public resource, we’ve published highlights of papers and talks from CCS 2022 that were notable or especially relevant to blockchain tech. Also included are the best-paper award winners among all the papers accepted this year:
▶️ BONUS/ holiday special: On some results and (grand) challenges in cryptoeconomics
a16z crypto head of research Tim Roughgarden shares an overview of some “grand challenges” in crypto and blockchain research at the intersection of microeconomics and macroeconomics, in this slightly expanded version of the talk he gave at the recent Crypto Economics Security Conference (CESC). [We covered an affiliated workshop at CESC in a previous installment of field notes, and in the last edition of this newsletter.]
watch the video (watch time ~45 minutes)
…explain to a child, a teen, or adults at the dinner table
--Sonal Chokshi, Robert Hackett, and the a16z crypto team
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