Ethereum has been the predominant platform for creating decentralized apps (DApps) for several years now, however, it has one risk. An Ethereum fork can bring in plenty of disruptions, which can adversely affect the DApp ecosystem. Decentralized Finance (DeFi) has now drastically reduced this risk.
Public blockchain networks are highly decentralized. Nodes have equal power and governance on such networks happen by consensus among the participants. While this generally works, there are times when contentious matters break this consensus.
The community on the public blockchain in question undergoes a split and the chances of a consensus diminish. Such contentious issues give rise to hard forks in the network, i.e., two camps go their separate ways with their respective versions of the blockchain network.
The 2016 Ethereum DAO hack had resulted in such a hard fork, subsequently, Ethereum and Ethereum Classic became separate blockchains. The camp that wanted to recover from the actions of the hacker became the Ethereum (ETH) community as we know it today, whereas the other camp became Ethereum Classic (ETC).
There could certainly be Ethereum Improvement Proposals (EIPs) with contentious upgrades in future. If the Ethereum community can’t reach a consensus, then we may very well see another fork!
Given the large number DApps already on the Ethereum network, a fork could disrupt all of them. Not to mention that scam stars take advantage of hard forks to dupe the users of public blockchain networks. It’s this risk that DeFi is addressing, although in ways we might not have foreseen!
How Decentralized Finance (DeFi) will rule out an Ethereum fork
Let’s first understand what DeFi is. DeFi is just an ecosystem of financial tools, however, they are on a decentralized public blockchain. Note that DeFi tools perform the same functions that their traditional financial systems counterparts would do.
The only difference between DeFi and their traditional counterparts is that the DeFi ecosystem uses the decentralization paradigm of public blockchain networks. Most DeFi tools run on the Ethereum network.
Open lending protocols, issuance platforms, decentralized prediction markets, decentralized exchanges, and stablecoins prominent examples of DeFi tools. Polymath, the Security Token Offering (STO) platform and Circle (USDC), the well-known stablecoin are essentially DeFi tools that make offer traditional financial products on a decentralized blockchain network.
You would think that the DeFi ecosystem is vulnerable to a future Ethereum fork, wouldn’t you? Ironically, the very popularity of the DeFi tools is creating a situation where a future Ethereum hard fork will be unlikely! Let’s see how.
The DeFi apps have a growing user base. If a part of the Ethereum community wants a hard fork, it must take all of the popular DeFi apps onboard. If USDC decides to stay on the original network, then the holders of USDC will have no gain in the forked networks!
What if a DeFi application decides to adopt the new chain? The project team will need to undertake painstaking efforts to support its users on the new chain, and such efforts might turn out to be impractical.
When all popular DeFi tools stay on the original chain, the new chain will hardly see any activities! Oracles that feed smart contracts will not run, moreover, smart contracts might process no value. A hard fork might ultimately bring no value for the rebel community!
The unexpected solution to the risk of an Ethereum fork
Ethereum always promised much more than the cryptocurrency Ether since it’s a powerful DApp platform. With the growing popularity of DeFi tools on Ethereum, the cost of a hard fork has become very high. The DeFi ecosystem is turning out to be an unexpected mitigation against future hard forks.
