Balancer, a leading decentralized exchange protocol, has proposed a solution to rescue the frozen crypto in inverse finance. The protocol aims to implement a “permissioned arbitrage” system in order to resolve the issues with inverse finance’s smart contracts.
The recent debacle of the DeFi protocol Inverse Finance has highlighted the challenges faced by permissionless protocols that rely heavily on smart contracts. The project’s developers lost access to the admin keys of the smart contracts, causing all funds to be locked in the system. This event caused a significant loss to the investors in the protocol, who were unable to withdraw their funds or perform any transactions.
Balancer has proposed a solution called permissioned arbitrage, which could help to resolve such issues in the future. In a blog post, Balancer stated that they could build an arbitrator smart contract that would be owned by a group of trusted parties. These parties would be responsible for managing the arbitrator contract and for resolving any disputes that may arise in the protocol. The smart contract would enable the parties to unlock the frozen funds and redistribute them to the rightful owners.
The concept of permissioned arbitrage is not new to decentralized finance. It has been successfully implemented by other protocols, such as Compound and Aave, to mitigate the risks associated with smart contracts. These protocols have a group of trusted parties that can use a specific set of permissions to resolve any issues that may arise. They can manage the contracts and adjust the parameters to maintain the stability of the system.
Balancer’s permissioned arbitrage solution is slightly different from the approaches taken by other protocols. The arbitration contract proposed by Balancer would act as a middleman between Inverse Finance and the Balancer Liquidity Pool. The arbitrator contract would hold the funds until the dispute is resolved, minimizing the risk of any parties losing their assets.
The arbitrator contract would have a few key features that would differentiate it from other arbitration contracts. Firstly, it would have a whitelist of authorized addresses that can interact with it. Secondly, it would have a threshold of the number of authorized parties required to initiate a transaction. Finally, it would have a time-lock period after which the transactions would be approved automatically.
The whitelist of authorized addresses would ensure that only trusted parties can interact with the arbitrator contract. These parties would be responsible for managing the contract and resolving any disputes that may arise. The threshold of the number of authorized parties required to initiate a transaction would ensure that no single party can make decisions alone and that the decision-making process is democratic. The time-lock period would ensure that the decisions made by the authorized parties are not impulsive and have enough time to be considered.
Balancer’s permissioned arbitrage solution has the potential to save funds in the event of a smart contract failure. This is a significant development in the DeFi ecosystem and could create a new standard for smart contract management. The proposal could be seen as a middle ground between the completely decentralized and centralized approaches to smart contract management. The protocol is permissioned but still decentralized enough to maintain the principles of decentralization.
In conclusion, Balancer’s permissioned arbitrage solution could be a game-changer for the DeFi industry. It offers a solution to some of the major challenges faced by permissionless protocols and could help prevent future incidents like the one in Inverse Finance. This proposal could help to establish a new standard for smart contract management by creating a middle ground between centralized and decentralized approaches. We look forward to seeing how this proposal develops and how it could benefit the DeFi ecosystem in the future.
A group of decentralized finance (DeFi) protocols are working together to unfreeze $300,000 worth of crypto that was locked during one of the biggest hacks of the year 2023. Inverse Finance, the owner of the crypto, is worried that arbitrageurs will take advantage of the situation once the funds are released on June 8th.
To prevent this, Balancer, an automated market maker, has outlined a plan for a “permissioned arbitrage” of its “bb-e-USD” pool. The pool had been frozen temporarily in March when Euler Finance, a borrow and lend platform, was hacked for $200 million. The Balancer plan needs approval from the community before it can proceed.
Three other DeFi protocols have already given the go-ahead for the plan. TempleDAO will lend Balancer the stablecoins it needs for the arbitrage, Euler has patched the smart contract, and Inverse wants its money back. Once the arbitrage is complete, there will be a second vote on how to distribute the recovered tokens.
The situation highlights the complexity of DeFi protocols and how they interact with each other. The protocols are like lego bricks that need to fit together perfectly, and any change to one protocol can affect others. Balancer is just one example of how DeFi protocols are interconnected and how much work is required to keep them functioning.
Inverse Finance is particularly concerned about recovering its coins, given the potential for arbitrageurs to swoop in and take advantage of the situation. The fact that the funds were frozen as a result of a hack adds an additional layer of complexity to the situation. Recovering funds lost in a hack is always a challenge, and the involvement of multiple DeFi protocols only adds to the complexity.
Going forward, it’s likely that we will see more situations like this, as the DeFi ecosystem continues to grow and mature. As new protocols are developed and adopted, they will need to be integrated with existing protocols, and the potential for conflicts and issues will increase. However, as the Balancer situation demonstrates, the DeFi community is capable of working together to find solutions that benefit everyone involved.
Overall, the Balancer situation highlights both the challenges and the potential of the DeFi ecosystem. While it can be complex and difficult to navigate at times, the potential for innovation and growth is enormous. As long as the community continues to work together and find solutions to the challenges that arise, the future of DeFi looks bright.