imToken Founder: Opportunities and Challenges in DeFi Development from a Wallet Perspective

This article was published on imToken, authored by Ben He, the founder of imToken.

On October 26, Ben, the founder of imToken, shared "The Ultimate State of DeFi from the Perspective of Wallets" at the 7th Old Friends Reunion event hosted by IOSG. Although a month has passed, the content of the sharing remains relevant, especially in the current market conditions.

Ben He, Founder of imToken

We have organized the transcript, and below is the original speech (with minor adjustments):

Hello, everyone. I am Ben, the founder of imToken. It is a great honor to participate remotely in the DeFi Summit held by IOSG in Shanghai. The pandemic has indeed limited our opportunities to attend offline events, but we can still stay connected online. Many DeFi projects from both the East and West are here today, and I hope to exchange and learn from everyone.

Today, I will share with you the theme The Ultimate State of DeFi from the Perspective of Wallets.

imToken, as you all know, was founded in 2016, focusing on creating a decentralized digital wallet. We aim to build a secure, reliable, and user-friendly digital asset management tool that can help more ordinary users manage their digital assets and experience the new products and services brought by blockchain technology.

In just over four years, the blockchain industry has developed rapidly. Especially Ethereum, which started in 2016 with the vision of a world computer, has Turing-complete smart contracts on this world computer. As a killer feature to attract talents to this new land of blockchain, Ethereum has successfully drawn many talents to participate in ecosystem building.

In these four years, we have seen the emergence of token standards like ERC20, and in 2017, we witnessed ICOs bringing significant stimulation to the industry. This method provided many projects with funding support, enabling them to promote the development of blockchain infrastructure. Then in 2018, the ERC721 NFT non-fungible token standard also saw some practical applications, with projects like CryptoKitties and the current ENS presented in NFT form. From 2019 to now, we have also seen significant development in DeFi, which is blockchain finance built on smart contracts, and open finance is thriving. This is the main topic we are here to discuss today.

The evolution of these blockchain technologies cannot be separated from the people participating in the joint construction of the ecosystem, whom we call builders, including developers, researchers, mechanism designers, and so on. Blockchain allows us to participate in the network in an open-source manner from various aspects, which is the charm of blockchain. It is a completely open network where anyone can participate in its construction. Its entire open-source spirit allows more developers to iterate and improve upon the achievements of their predecessors. Similarly, the currently popular community governance mechanism in blockchain can gather collective wisdom and continuously break through innovations. From this perspective, blockchain is truly using technology to drive change in the world.

This is a panoramic view of the Ethereum ecosystem organized by IOSG Ventures. We can see that there are now hundreds of projects and teams building these application protocols and products in different fields. It is precisely because of these strong developer communities that blockchain can continue to advance.

From another perspective: the user. I believe that "users" should be the motivation for developers to create innovations and the ultimate goal of their creations. Because we need to use technology to create products and services for users, allowing more people to enjoy the benefits brought by new technologies and change their lives.

Three Major Challenges in DeFi from the Wallet Perspective

From the wallet perspective, we can more directly see the points of alignment or gaps between products and users. So today, I will focus more on the current state of blockchain development from the perspective of wallet users and the challenges faced by the rapidly developing DeFi. Of course, the most important aspect here is the product user experience, which is a crucial condition for the mainstream adoption of blockchain technology.

Challenge One: Private Keys

Private keys are a very technical concept, so it is quite difficult for ordinary users to digest and understand the principles and functions of private keys. If they cannot understand it well, it is hard for them to securely manage their private keys.

However, as a decentralized wallet, imToken has always insisted on educating users to gradually understand private keys and the series of security measures for controlling private keys. But this is not just a purely technical issue; it is a trade-off between technology, security, and product experience.

From the industry's perspective, we see different types of solutions for private keys. For example, centralized exchanges help users manage private keys through a fully custodial approach, meaning users' assets are held by a third party. This method still carries a series of potential black swan events or risks, so we prefer to actively promote non-custodial methods, allowing users to control their digital assets.

In the Ethereum ecosystem, we see some very interesting attempts, such as smart contract wallets that decouple accounts and private keys, presenting accounts on Ethereum's smart contracts, allowing users to manage their digital assets, including setting a series of control permissions, and hiding the private keys within the software, making it seamless for users. When they do encounter a loss issue, there are co-managers or guardians who can help users recover control of their accounts.

There are also technologies like TSS (Threshold Signature Scheme) that are continuously being experimented with. This technology is currently mainly being tested by some large institutions. As a multi-signature co-management method, TSS is a more secure digital asset management solution, but it still needs to evolve in terms of user experience.

Challenge Two: Gas Fees

The entire DeFi sector has brought a large number of users through liquidity mining, driving gas fees to continuously rise. We have seen gas fees increase from a few tens of gwei to hundreds or even thousands, resulting in transaction costs of dozens of dollars for on-chain transactions, which is a significant burden for users. Not only is the cost high, but there are also other intuitive feelings at the user level, such as slow transaction packing, especially after a long wait, if the transaction still fails, it leads to wasted gas fees.

The core of this issue lies in the throughput of the entire Ethereum network, which is a scalability issue. In terms of solutions, miners have already taken some actions in the short term, increasing the original 10 million GasLimit throughput to 13 million, but this is still a drop in the bucket and cannot provide much help. Ethereum 2.0 is essentially aimed at solving scalability issues, and Eth2 is still in the process of being implemented. A relatively mid-term solution is the community's Layer 2, which aims to migrate some applications and services to Ethereum's Layer 2 network to alleviate the pressure on Ethereum Layer 1.

In addition to the cost of gas fees, gas fees themselves are also a significant barrier. For new users, if they do not have ETH, it is almost impossible to proceed, as any on-chain action requires ETH to pay gas fees.

So at this stage, there are a series of solutions to this problem. For example, Meta-Transaction and GasStationNetwork use a payment mechanism that allows users to pay gas fees through a third party without having ETH. Correspondingly, users need to pay with their other tokens. Additionally, new standards like Gasless Token have emerged, allowing users to authorize third parties (relayers) to help them transfer tokens by signing off-chain.

In this regard, imToken has also proposed a phased solution: Gas Station, which aims to help our users solve this barrier issue. Through the gas station on the imToken "Browse" page, users can quickly exchange their other tokens for ETH, even if they do not have ETH, for subsequent on-chain transactions.

Challenge Three: Complexity

We know that DeFi mainly realizes financial engineering on-chain through smart contracts, which is a very powerful advantage brought by smart contracts. DeFi, as an open and permissionless protocol network, allows anyone to use its services, and any project can integrate these protocols through combinations to create new products. We call this form Money Lego.

Tokens on the Ethereum network serve as a very good economic incentive mechanism, helping projects to do cold starts and attract early liquidity or users. However, weaving these protocols together infinitely inevitably brings complexity issues.

For example: a user over-collateralizes ETH into the Maker protocol to issue the stablecoin Dai, and then deposits Dai into the Compound lending protocol to earn interest. At this point, Compound will return cDai (deposit receipt) to the user, who can also place cDai into applications like PoolTogether (no-loss lottery). PoolTogether will then return a token called poolDai to the user.

From here, we can see that the user's ETH turns into Dai, then into cDai, and finally into poolDai, involving four tokens and three network protocol combinations, so the overall combination of such protocols will bring greater systemic risks. Moreover, such combinations may trigger attack vectors that are not easily detected by security audits, amplifying the overall systemic risk. The robustness of this system also becomes a barrel effect, where the weakest protocol may determine the overall security level.

Interested students can learn more about Yearn, which is also a typical complex system resulting from a layered combination of protocols. Participating in it feels like stepping into a maze.

I believe that this complexity is daunting for ordinary users because they may end up not knowing where their assets are, or they may forget what authorizations they have made in which protocols, leading to future risks. Therefore, if DeFi is in such a state, we can imagine that it can only serve a small number of professionals.

The Final State of DeFi

Under the three major challenges mentioned earlier, in which direction will DeFi evolve, and what will its final state look like?

First, we still need to solve the scalability issue. Because the overall network load and scalability determine the economic volume it can support in the future, as well as the scale of users it can accommodate. We see that Ethereum's business capacity has reached its limit, and many businesses have been passively squeezed out in the competition for resources or have actively switched to other networks. Therefore, Ethereum has long planned the 2.0 initiative, hoping to solve the scalability issue of Ethereum Layer 1 through sharding. Currently, the Ethereum Foundation is actively promoting this aspect.

For the community, we have recently seen many Layer 2 solutions, such as ZK-Rollup, OP-Rollup, Plasma, etc., actively promoting scalability solutions, and some projects have already reached the milestone of going live on the mainnet, but they are still in a state of technical validation and need more ecological applications and users to migrate to Layer 2.

However, from the perspective of user-facing wallets, we feel that the overall development path, whether Layer 1 or Layer 2, is currently very fragmented. As we mentioned, Layer 2 has different solutions, but we do not know what technical path it will ultimately land on, so the future network should be a state where various solutions coexist. For wallets, which are user-facing infrastructure, I believe there will definitely be a network aggregation layer formed at the wallet application level.

We call this layer the Omni Layer, where we hope to solve the series of issues mentioned earlier. We hope it can resolve the issues between user accounts and private keys, especially addressing the fragmentation of accounts across different networks and chains. At the same time, we also hope to tackle the challenges of private keys on the Omni Layer, helping users solve the cost issues when using networks, the efficiency issues in network interactions, and the complexity issues when participating in network activities.

Only when these issues are alleviated or resolved can we hope to enable a broader and more mainstream group of ordinary users to actively embrace this new technology and use the new applications and services brought by blockchain.

So regarding the final state, we can see that Layer 1 may primarily ensure the security of underlying assets, including the entire data state and finality on-chain, while Layer 2 addresses scalability issues, allowing low-cost, high-efficiency networks to meet the daily usage needs of the general public.

We believe that most of the complex DeFi protocols are not suitable for ordinary users, whether they are deployed on Layer 1 or Layer 2. For ordinary users, they may only need to simply hold tokens. In other words, the financial engineering of DeFi may ultimately present a state to ordinary users that is just a token, which is the abstraction and objectification of services, and it is also the best way to express it to users.

Token

Tokens, as the smallest economic unit, can help the entire DeFi avoid a series of issues under the complexity crisis.

For example, in prediction markets, they can also issue some predictive tokens. Recently, Gnosis issued two tokens for the U.S. election, one called yes trump and the other called no trump. So if you want to guess the outcome of the U.S. election, you can participate by purchasing tokens. This is what we mean by users being able to participate in the financial activities of the network through tokens.

For users, this extremely simplified approach corresponds to only two states: having or not having. The "having" state means that users hold tokens and have the right to participate in various services and applications within the DeFi protocol, or they can transfer the tokens for exchange, either for another token or for goods and services.

So in summary, we hope to see users participate indirectly in DeFi by holding tokens on the Omni Layer network. In this model, their native assets are securely stored on Layer 2. DeFi protocol or service providers issue them on Layer 2 in the form of warp tokens, allowing users to hold them very easily. At the same time, these wrap tokens can also circulate very efficiently and at low cost within the Layer 2 network.

Today, the sharing I brought to you mainly reflects our speculations on the future development of DeFi and blockchain during our work at imToken, and we look forward to seeing how it unfolds.

Finally, we also hope that all participants in the blockchain ecosystem can collaborate to create and collectively face these challenges. That concludes today's sharing. Thank you, everyone.