MakerDAO Risk Manager: ProgPoW Could Do More Harm Than Good to DeFi Industry

If Ethereum adopts ProgPoW, it may put DeFi protocols at risk.

Author: Cyrus Younessi, Head of Risk Management at MakerDAO

The debate over whether to activate ProgPoW is posing a risk of division within the Ethereum community. ProgPoW is a proposal aimed at transitioning Ethereum's hash algorithm to be resistant to ASICs.

Supporters of ProgPoW argue that transitioning to ProgPoW in the months leading up to Ethereum's transition to PoS will help prevent miner-dominated forks, as ProgPoW would disadvantage those using specialized mining equipment.

However, many members of the Ethereum community have expressed opposition to activating ProgPoW, stating that while ProgPoW's intended goal is to avoid contentious forks during the transition to Proof of Stake, if activation increases the likelihood of adverse outcomes, it contradicts the original objective.

Over the weekend, Cyrus Younessi, Head of Risk Management at MakerDAO, shared a series of tweets on Twitter offering his perspective from a risk and security management standpoint for DeFi protocols on Ethereum. He pointed out that adopting ProgPoW on Ethereum would put DeFi protocols at risk.

Here are the key points from Cyrus Younessi's tweets:

DeFi will be at risk due to the ProgPoW algorithm. If you care about collateralized DeFi systems like Maker/Dai, Compound, dYdX, etc., please consider your stance on ProgPoW. I believe the current priority is to prevent contentious forks rather than approving/disapproving ProgPoW (PP).

If the ProgPoW algorithm is pushed for implementation, Ethereum is likely to see contentious forks, as there will certainly be those who want non-ProgPoW blockchains to have economic value as well. Even if the fork is temporary, there will be immediate liquidation of a significant amount of collateral.

For example, if Ethereum's market value is split 60/40 – a ratio we have seen in Ethereum/Ethereum Classic (ETC) and Bitcoin/Bitcoin Cash (BCH) splits – a large amount of debt collateral positions (Vaults) and other positions will be liquidated. Currently, the Maker collateralization standard is a threshold of 150%, but the average collateralization ratio is around 300%.

Even if ProgPoW is a successful hard fork, with all oracles bullish on the Ethereum blockchain based on the ProgPoW algorithm and exchanges listing all non-ProgPoW algorithm Ethereum tokens as altcoins, as soon as the non-ProgPoW algorithm blockchain loses 40% of its economic value, widespread liquidation will occur.

In addition to the spiral effect triggered by ordinary investors' short positions, panic, and other factors, the situation may worsen. Even if the ProgPoW algorithm blockchain emerges victorious and regains all value a few days later, the damage will have already been done.

Alternatively, if we can foresee the split will happen, DeFi protocols have no choice but to immediately increase collateral requirements (raise the collateralization ratio to 200%? or 250%?) to ensure ecosystem security, but this will also lead to some liquidation and other issues.

Currently, some DeFi protocols seem reluctant to get involved in the discussion about whether to fork with ProgPoW, or they may not have realized the risks associated with this event. Unless Ethereum can guarantee that the failed fork chain will be immediately eliminated, I would definitely think twice about it. In fact, DeFi protocols cannot afford to wait for a month to see which fork chain ultimately wins.

Here are some of my personal thoughts:

1. All these issues will arise with alternative clients and exchanges;
2. My hope is that if Ethereum ultimately cannot avoid the ProgPoW upgrade, then a backup client can be released to maintain a reliable non-ProgPoW fork chain;
3. I believe that if one side must retreat, it is the ProgPoW support side, as they are responsible for not causing any contentious blockchain splits;
4. In the case of a contentious blockchain split, inaction should be the default setting, as it is a cryptocurrency guideline, and we have many precedents because this is the right thing to do;
5. We cannot seek guidance on DeFi from Ethereum core developers. At this stage, they are reducing any potential for blockchain forks to occur;
6. I believe for the Maker community, the risk of doing nothing is higher, so they might as well choose a side and ensure that side can ultimately emerge victorious.

These views expressed by Cyrus Younessi have sparked a lot of discussion. "Bonedaddy | bonedaddy.eth," Co-Founder and CTO of RTradeTech, responded to these remarks, stating:

"This is not ProgPoW's fault, but rather a flaw in DeFi protocols themselves. If the design goal of DeFi protocols is not to try to eliminate as many threats as possible, such as forks, then this is a problem with the protocol itself, not the upgrade. So, DeFi protocol designers do not actually want to deal with flexible systems and the trouble of managing flexible systems, and then want to hijack Ethereum to prevent the ProgPoW upgrade."

"Cyrus.ismoney.eth" responded, saying: "Whenever someone wants to propose a contentious fork, Ethereum should be 'hijacked,' yes."

"Bonedaddy | bonedaddy.eth" replied:

"This position is not good at all. With this stance, you may never do anything controversial. We have controversies over same-sex marriage; should we simply ban same-sex marriage if a small group might voice some dissent, would you feel uncomfortable about that?"

Another community member, Kay Kurokawa, pointed out that "Cyrus.ismoney.eth's" viewpoint seems to suggest that DeFi protocols are not unable to address the blockchain split issue caused by ProgPoW, but rather unable to handle a 40% drop in Ethereum's price, indicating that the problem may lie with DeFi protocols themselves, not ProgPoW.

In response, "Cyrus.ismoney.eth" stated:

"Correct, but if you foresee a 40% price drop, you will certainly avoid letting that happen. As I mentioned, DeFi protocols must increase collateral in advance for precautionary purposes, or they will run into more trouble."

Kay Kurokawa questioned: "What kind of trouble?"

"Cyrus.ismoney.eth" replied: "Explaining to all users with collateral rates between 150-250% why funds are suddenly being liquidated, overall, we did a poor job in conveying that the 150% collateral threshold was not hardcoded, I am sure there are other issues."

Kay Kurokawa responded: "It seems that DeFi needs a lot of customer support, so is DeFi really a sustainable direction? If people are unaware of these risks, there will be more problems that will affect them in the future."

This article is authorized by ChainNews for republication. Source: ChainNews (ID: chainnewscom)

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