How crypto’s past affects the present and perhaps gives us insight into the future?
Sometimes if you study the past, it helps you understand the present better and just maybe give you some insight into the future.
his post is a tale of the first three blockchains and how the problems we have now with transactional volume were known in the early days. The first blockchain was Bitcoin, second came Litecoin and third came Ethereum. Bitcoin grew to a blockchain with over ten thousand nodes in the Bitcoin Network, running the software and securing the chain. Bitcoin became and still is the largest public blockchain in existence and is the model of decentralization. Interestingly enough one of Bitcoins first shortcoming, noted only after it had grown quite large and it had a large number of transactions was an issue with the speed of transactions caused by intrinsic limitations on its transactions per second capability. Litecoin, the second cryptocurrency was very similar to Bitcoin, except it featured increased block size to improve speed. Bitcoin Cash, the first HardFork of Bitcoin was forked to change block size and transaction speed, amongst other reasons.
Another historical note, is that the creator of Ethereum was in fact an early fan and supporter of Bitcoin. In fact his early articles in Bitcoin Magazine were about altering Bitcoin to run Smart Contracts. However the majority of the Bitcoin community didn’t want to change the software. So Ethereum was subsequently created with smart contracts in mind and became the first blockchain to run them. It has subsequently become synonymous with Smart Contracts.
It is clear from the history of cryptocurrency that success brings users, users drive transactional volume and blockchains should be able to scale to meet this demand. It is difficult to judge the success of the small changes made to Litecoin and Bitcoin Cash with regard to managing transactional volume because their volumes are not large enough to compare to the numbers of users and transactions on Bitcoin.
However Ethereum did achieve high numbers of users and transactions and although it was built to have faster transaction speed then its predecessors, it is a victim of its own success as its user volume of transactions have exceeded its capacity periodically causing limited number of situations where transactions are delayed hours or a day. The popularity of the game crypto-kitties was the first test of the Ethereum blockchain capacity and it failed. Transactions cued up, delays off minutes and then hours occurred. After the first week peoples expectations were reduced. And while this issue resurfaced periodically measures are being taken to combat the problems. It wasn’t until a March of this year that the MakerDao and Ethereum blockchain were tested severely again.
Smart contracts are the backbone of decentralized finance. The MakerDao is a Credit Facility on the Ethereum Blockchain. The MakerDao is by far the biggest decentralized finance platform in existence. However, one of the MakerDao’s weaknesses is that it is what this story is about, some of the history.
As quoted above the very busy MakerDao is run on the Ethereum blockchain and the Ethereum Blockchain has trouble handling high volumes of transactions. It is believed that on March 12th, 2020 there were over 683 million dollars in Ethereum deposited in the MakerDao The MakerDao provides loans called collateralized debt products, which are used by Ethereum investors to increase their returns on investment. These collateralized debt products are the main product of decentralized finance. These CDP are debt borrowed against the value of Ethereum. On March 12th, 2020 the price of Bitcoin dropped from $9000 to $4000 and the Altcoins like Ethereum followed, shedding 50% of their value in one day.
So many of the collateralized debt positions on Ethereum which were over Capitalized when Ethereum was $200, were suddenly under capitalized debt positions when Ethereum hit $100. This type of market movement with sudden under capitalization of debt triggers margin calls in the stock market and liquidations at a DeFi Credit Facility. But liquidations are run differently on the MakerDao the Ethereum is auctioned off in a competitive bidding process that normally results in the best, or highest possible price for liquidated Ethereum.
But there was one huge problem. The bids are transactions. Ethereum reaches its transactional capacitance and smart bidders notice fewer and fewer bids making it through the transaction process. So the bidders did what any smart business person would do... in the absence of competing bids they bid very low. Sometimes zero dollars on accounts containing hundreds and even thousands of Ethereum. And in the absence of competing bids, these zero bids won. It was unbelievable and yet it was very believable.
This is what I think happened based on the many stories written by the event.
Later, after the smoke cleared Investors signed into their accounts expecting to have lost 50% of the Ethereum plus a liquidation charge of 13 percent. But instead they found that their accounts were at zero. Instead of competitive bidding the congestion on the Ethereum blockchain resulted in singular bids of zero dollars and because they were unopposed, the bids were executed. Smart Contracts aren’t smart, but they are dependable. They sold to the highest bidder in an attempt to recover funds. But with zero dollar bids they liquidated not some but all the Ethereum in each account. They did exactly what they were programmed to do. They don’t think they execute. That’s why we love them and that’s why we fear them.
The MakerDao gets wrecked due to transactional issues on the Ethereum Blockchain and investors lose their entire investments. The subsequent lawsuit against the MakerDao results in a 25 million dollar settlement against them and investors received compensation. Soon there will be alternatives to Ethereum running compatible smart contracts (Binance) and soon Ethereum will launch its newest scaling solution Casper. The world of Decentralized Finance is in a continual state of change, grab your popcorn! This may be quite an interesting show!
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Posted Using LeoFinance
