The emergence of new cryptocurrency ecosystems like decentralized finance (DeFi) and play-to-earn gaming can involve a steep learning curve for new users. Minor mistakes – like mistyping a public address or interacting with the wrong smart contract – can have major consequences and the user could incur irreversible financial losses. As the crypto user experience grows in complexity with cryptocurrency markets spanning numerous different blockchains, users will need to learn about how blockchains interact with various cross-chain bridges to move assets between chains.
Centralized exchanges are often thought of as competitors to the DeFi ecosystem. But, in fact, they may be well-placed to improve the DeFi user experience with a complementary relationship between DeFi and traditional financial markets. Traditional finance’s major strengths include customer acquisition, customer support, and reporting and record keeping – and many institutions already have large customer bases looking to get into cryptocurrency markets.
Instead of trying to build DeFi infrastructure from scratch, platforms like Gemini may be better optimized to support existing DeFi markets by offering custody-based interoperability solutions, including customer support. For example, a custodial wallet could allow users to seamlessly deploy their assets within any preferred DeFi platform from a single user interface, providing a user-friendly means for existing customers to participate in DeFi markets.
Meeting Multi-Chain Demand With Wrapped Assets
Gemini has long been focused on creating a scalable on/off-ramp between traditional banking and cryptocurrency assets. Through its extensive experience building industrial-grade storage solutions for crypto assets, Gemini has repeatedly heard a consistent customer demand for a simple universal gateway that empowers users to deploy their crypto assets on any blockchain and within any application. One of Gemini’s initial implementations of meeting this growing multi-chain demand comes in the form of EFIL, a new wrapped asset feature available within the Gemini wallet.
EFIL is an ERC-20 token deployed on the Ethereum blockchain that is backed 1-to-1 by Filecoin (FIL) held in Gemini Custody. FIL is the native token of the Filecoin Network, one of the leading decentralized data-sharing blockchain platforms, used to purchase storage space on and retrieve files from the Filecoin Network. Essentially, EFIL is a representation of FIL on the Ethereum blockchain, with full collateralization managed by Gemini Custody.
This wrapping feature can vastly simplify the process of bridging assets back-and-forth between disparate blockchains. All end-users need to do is click a button in the Gemini wallet to use FIL for multiple applications. Not only does it reduce friction between the Ethereum and Filecoin blockchains; it increases the utility and user base of certain existing crypto assets. For example, FIL is no longer confined to its own blockchain, but can now be integrated within the Ethereum DeFi ecosystem – it can be listed on a DEX, leveraged as collateral for a loan, or used to pay for Filecoin services directly from the Ethereum blockchain.
Creating Transparency Around EFIL With Proof Of Reserve
If traditional financial institutions are going to serve as custodial-based gateways to DeFi, they will need to meet the standards around transparency and reliability of the underlying DeFi protocols. This does not mean traditional financial institutions need to completely reengineer their backends. Instead, they can potentially combine their existing centralized infrastructure with decentralized infrastructure for a hybrid approach to DeFi services – one which is designed to create a simpler user experience, offer greater insight into how the underlying DeFi protocols’ backend services work, and provide stronger reliability guarantees.
In the case of Gemini’s EFIL wrapper, its wrapper functionality is built using an open-source Ethereum smart contract that wraps FIL and converts it into an ERC-20 token, EFIL. The EFIL smart contract mints and burns EFIL, and ensures that the value of available EFIL is equal to the amount of FIL held in Gemini Custody. Additionally, Gemini sponsored a Proof of Reserve (PoR) data feed powered by Chainlink. Chainlink PoR maintains an on-chain data feed regarding the current collateralization of EFIL by using oracles to monitor the quantity of FIL stored in the Gemini EFIL smart contract and to compare it to the circulating supply of EFIL on Ethereum.
The Chainlink PoR oracle, which is now live on mainnet, is a potentially significant component in growing the adoption of EFIL throughout the Ethereum DeFi ecosystem. DeFi protocols can reference the PoR oracle to verify that EFIL is fully collateralized at any time before executing key on-chain functions – a de facto automated on-chain audit of Gemini Custody. If EFIL is found to be under-collateralized, the DeFi protocol can implement customized logic to protect its users from insolvency risk, such as temporarily pausing new loans that supply EFIL as collateral. DeFi protocols do not need to trust that Gemini is not participating in fractional reserve practices – the protocols can verify the collateralization themselves directly on-chain using the Chainlink decentralized PoR oracle network.
Merging Traditional Finance And DeFi
Ultimately, all stakeholders can benefit from this merger of DeFi and traditional finance: DeFi protocols get access to more users; traditional finance platforms can service the growing DeFi demand from their existing customers; and end-users are able to add cross-chain utility to their existing assets while maintaining their ownership in the underlying crypto. As the blockchain economy becomes increasingly multi-chain and as more traditional institutions seek to bridge their existing systems with various on-chain environments, many expect the demand for secure cross-chain interoperability to continue to grow.
Though some users may want physical custody of their own assets, a large portion of the world’s population wants or needs a simplified user experience to enjoy the benefits of crypto. Gemini is determined to help grow the adoption of DeFi by tackling user experience problems head-on, with innovative features like its wrapped EFIL asset function already live in production, supported by Chainlink oracles. Gemini is excited to continue showcasing how traditional financial institutions can offer potential solutions to core DeFi pain points, most notably by combining custodial infrastructure with various decentralized technologies like smart contracts and Chainlink oracles to potentially create more transparent, fair, and easy-to-use financial products.