Censorship in DeFi and the Transition to POS: Causes and Consequences

Finance Magnates got the opportunity to get the thoughts of Brian Pasfield, CTO at Fringe Finance on the future of Ethereum's move to PoS, DeFi's split into permitted and non-permitted, and shares his vision of where this could lead DeFi in the future.

Q. The transition to PoS is the dawn of the bifurcation of DeFi into 'permitted' and 'non-permitted' DeFi. What are the possible consequences of it?

Authorities have commenced attacks on the DeFi ecosystem by introducing censorship. The core value proposition of DeFi is censorship resistance. So, any implementation of DeFi that enables censorship is not DeFi. “Permissioned” DeFi = on-chain CeFi, which eliminates all that is valuable about DeFi. Not even composability as a benefit remains, as it poses existential risks for protocols composed with sanctioned/permissionless protocols. And, much of DeFi has centralized components, which, therefore, attack vectors for authorities to coerce censorship.

Q. What are the prospects of DeFi then?

DeFi’s only path is to pursue avenues that assure its censorship resistance. This means removing the reliance on a number of things that are variously characteristic of DeFi today, including doxxed teams, centralized pegged stablecoins and any notion of PoS given PoS introduces a greater attack surface for authorities to enact bribery attacks that can compromise the network.

Q: So Why is DeFi so valuable?

Many participants in the DeFi ecosystem do not recognize DeFi’s core value proposition of censorship resistance. Many view DeFi as just an additional way to deliver financial services and a way to achieve rapid financial gains. But, DeFi is distinct because of its core value proposition. This proposition is valuable to those who have a security mindset - and those who do not want to be stolen from. A security mindset refers to the notion of personal sovereignty and that the aims of authorities and some supra-national organizations are all too often not in the people's interests. A good introduction to understanding this can be found in The Prince by Niccolò Machiavelli.

Q. The censorship calls from the authorities will increase. Does this mean that DeFi projects will soon face new difficulties in obtaining licenses? Will they close more often due to censorship?

Any reference to licenses and DeFi in the same sentence indicates a misunderstanding of what makes DeFi useful. The core value proposition of DeFi is censorship resistance. A truly censorship-resistant DeFi protocol can not be regulated, as it is not susceptible to state coercion. Any nominally DeFi protocol that does require a license is an example of on-chain CeFi. Given DeFi’s core value proposition, by definition, DeFi will not and cannot be regulated by authorities. It is the centralized aspects of current DeFi that are censorable.

Q. Give examples of DeFi projects with centralized aspects. What are their risks?

Examples of DeFi projects with centralized aspects are USD-pegged stablecoins. Ultimately, they rely on meat-space entities that can be – and have been – coerced by authorities to enact censorship. DeFi will move away from its current love affair with USD-pegged stablecoins because of the attack surface they represent in terms of coercion and censorship by authorities.

Q: Many people strongly hold that PoW is a danger and that a move to PoS is necessary. However is there a risk of PoS’s attack vectors being exploited by vested interests?

Yes, there is a significant risk. PoS bribery attacks will be attempted. DeFi on PoS will then be TradFI but on a censored blockchain. For humans to unshackle themselves from coercion and censorship and to move to a state of greater freedom, a security mindset is needed. Proper DeFi, with its core value proposition of censorship resistance, is necessary. There are people in the DeFi ecosystem who understand the core value proposition of censorship resistance, and DeFi will find a way. Look for these people and follow their projects.

Q: The industry uses PoS for several reasons: to lower fees and use less energy, and it is also claimed to increase security. Is this true and are there any security issues caused by the adoption of PoS?

Let’s analyze new security issues added by the adoption of PoS. Fees are a function of demand for block space. The market dictates the price. The participants demand the security afforded by the current blockchain and are willing to pay the fees. If participants did not demand it, the price would be lower. And we now have L2s which increase throughput and correspondingly reduce fees.

The remaining reason for Eth PoS is energy usage. PoW and PoS have different properties; hence, there are trade-offs moving from PoW to PoS. Particularly, PoS represents a greater attack surface for censorship via bribery attacks, which, if successful, could be fatal for the network. If more people were aware of this, they would ask, “is the energy usage matter really as it’s been described by untrustworthy supra-nationalists?” “And if so, is reducing DeFi’s energy usage at the price of removing DeFi’s core value proposition of censorship resistance worth it?”

The solution to this is (proper) DeFi will find a way to remain uncensorable in the long term. This may or may not be on the Eth blockchain Blockchain Blockchain comprises a digital network of blocks with a comprehensive ledger of transactions made in a cryptocurrency such as Bitcoin or other altcoins.One of the signature features of blockchain is that it is maintained across more than one computer. The ledger can be public or private (permissioned.) In this sense, blockchain is immune to the manipulation of data making it not only open but verifiable. Because a blockchain is stored across a network of computers, it is very difficult to tampe Blockchain comprises a digital network of blocks with a comprehensive ledger of transactions made in a cryptocurrency such as Bitcoin or other altcoins.One of the signature features of blockchain is that it is maintained across more than one computer. The ledger can be public or private (permissioned.) In this sense, blockchain is immune to the manipulation of data making it not only open but verifiable. Because a blockchain is stored across a network of computers, it is very difficult to tampe Read this Term - and likely will not be, given the current PoS adherents’ ideological positions distort their ability to make decisions with the required objectivity.

Q: What's your vision of the future of DeFi?

B: DeFi is just starting. It is so new. Many DeFi projects have not fully embraced Its core value proposition of uncensorability. We’re now seeing authorities taking action not only to sensor DeFi, but to confiscate assets and take legal action. There is effectively no reason for censored DeFi to exist. DeFi needs to divest itself of its current vulnerabilities to censorship so that it continues to deliver on its core value proposition.

DeFi is one part of the decentralized economy. It's a part of the future decentralized world. A whole new body of legal precedence would evolve in this decentralized space that completely bypasses the distortions of state-based legislation systems. In the areas where it competes with meat-space legacy institutions, the decentralized world will be more efficient and deliver greater prosperity to communities.

Brian Pasfield is the CTO at Fringe Finance with almost 10 years of expertise in blockchain, cryptocurrency, fintech and DeFi. He has delivered technically-complex projects that have leveraged his engineering background and keen understanding of industry trends and philosophies. Furthermore, Brian has worked with industry blockchain bodies to lobby for legislation and government policy changes.