DeFi or ‘Decentralised Finance’ has been the most talked about and best performing crypto asset sector in 2020. DeFi holds great promise and it aims to allow anyone to engage in financial activities such as lending, borrowing and trading on decentralised applications or dApps.
The emergence of this exciting new crypto ecosystem has started to give cause for concern as cracks have begun to emerge in the DeFi ecosystem. Prohibitively high Ethereum gas prices mean that less well-funded users are effectively being excluded from using DeFi in a cost-effective manner. Slow transaction settlement times have led to frontrunning and inefficiencies in the markets.
So although DeFi offers huge potential, how will it reach the mainstream with these challenges? Well new solutions are emerging that aim to tackle these fundamental scaling and speed challenges.
ECOChain has developed an innovative token called ECOChain Finance Growth (EFG), to solve some of the fundamental scaling and speed problems facing the Ethereum DeFi ecosystem. EFG acts primarily as a lending token within the ECOC ecosystem and is designed to support the development of financial applications. For example EFG is instrumental in balancing the lender and borrower markets.
One of the key attributes of ECOChain is its speed and throughput, which is what makes it suitable for DeFi applications. The blockchain can handle over 540 transactions per second and blocks are settled every 32 seconds.
EFG is a standard ECRC-20 token which means that the blockchain is compatible with Ethereum and ERC-20 tokens can be used as collateral assets for EFG dApps with the use of ECOC Coins. With the use of ‘wrapped tokens’ and tokens from compatible blockchains such as Ethereum can be swapped using atomic swaps. In other words, assets like bitcoin can be wrapped and transferred within the EFG ecosystem of DeFi applications. Wrapped tokens follow the ECRC-20 standard so that they can join the dApp without problems.
EFG dApp also has an oracle solution that can send reliable market data to the blockchain which can be used to build DeFi applications straight away. There is a fixed supply of one million EFG tokens and tokens can’t be created, minted or burned.
EFG will initially be used primarily for borrowing and lending, where users can first deposit their ECOC into the system as collateral to borrow. Then, if they wish to stake EFG to help secure the Proof-of-Stake consensus mechanism they will receive daily staking rewards that are paid out in GPT tokens, depending on the duration and amount of EFG stake.
So, what is GPT?
GPT stands for “Grace Period Token” is paid to users as a reward not only for staking EFG but also for delaying liquidation of EFG that is used in lending or borrowing activities. This functionality generates demand for the GPT token as delaying margin calls allows users to allocate their capital more efficiently to optimise returns from DeFi trading strategies.
Several key economic theories have been considered in the design and development of ECOChain to make it suitable for the modern economy and to promote the use of DeFi applications:
Although a detailed investigation of these theories is beyond the scope of this article we will briefly cover them. Starting with Arbitrage Pricing Theory (ABT) which is a pricing model that is based on the fundamental idea that the returns from an investment can be predicted by analysing the linear relationship between the asset’s expected return and a number of macroeconomic variables which can measure the risk of said asset.
Option pricing theory (OPT) on the other hand uses data specific to options products, such as implied volatility, interest rate, exercise price etc to value options. Why is this useful? Well with better pricing of investment products like options the market will be more efficient. Speaking of efficiency, another financial theory ECOChain embodies is the efficient market hypothesis (EMH) which in a nutshell states that an asset's price e.g. a stock like APPLE (APPL) accurately reflects all the available information about that stock. Therefore all the prices one sees on the market are an accurate reflection of the value of the market, in other words the market is efficiently priced.
Capital Asset Pricing Model (CAPM) is a valuation model that is well adopted in traditional markets and is used to value capital investments and quantify risk and expected returns. Modern Portfolio Theory (MPT) is similar to CAPM but it is more tailored to investors who want to lower the risk of their portfolio whilst maximising the expected returns. Typically this will involve having a diversified portfolio of assets that are uncorrelated, so when some of your portfolio goes down in value, other parts tend to increase in value. So there you have it, a whistlestop tour of the financial theories ECOChain and the EFG token seek to embody.
ECOChain and EFG represent another milestone in blockchain and DeFi innovation that has been created by blockchain developers who have a real passion for proof of stake and decentralization. As the DeFi ecosystem continues to grow at a rapid pace EFG may become a popular blockchain to host this burgeoning activity. EFG’s compatibility with other blockchains like Ethereum allow DeFi liquidity to flow to EFG if scaling and gas prices become an insurmountable barrier to building DeFi applications on Ethereum.
This is a sponsored story. Its content does not constitute financial advice. Please remember that the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. If you are unsure of the suitability of your investment please seek advice.