Clover Finance Has Crashed Hard – Was There a Way to Avoid It?

On Clover Finance

February 18th, 2021. Clover Finance completes its seed investment round. The new company was planning to significantly improve the existing model of De-Fi apps. Among the main problems of the incumbent firms, it listed the allocation of the entire transaction commission to miners, gas fees in ETH, slow transaction speed, and the inability to exchange data from Ethereum to Bitcoin. The company proposed a range of solutions, including the following:

  • Distributing part of the gas fee to dApps developers.
  • Charging gas fees in the form of the asset itself (effectively, taking a commission on transactions).
  • Parallel transaction processing.
  • A special 2-way peg system was devised for establishing a connection between different blockchains.

According to the whitepaper, Clover has been designed as a parachain on Polkadot. A few words on the latter: Polkadot is a network that allows “specialized blockchains to communicate with each other in a secure, trust-free environment“. Phrasing it as a simple analogy, it is the universal adapter that helps different blockchains in the network — parachains — to seamlessly exchange data. Other remarkable breakthroughs of Polkadot include parallel transaction processing and bridges — ‘special blockchains that allow Polkadot shards to connect to and communicate with external networks like Ethereum and Bitcoin‘.

Sounds wonderful. However, were these techy bells and whistles enough to keep the token price stable?

Whitepaper Under Scrutiny

So, could investors foresee the crash? In order to find an answer to that, I’ve gone through the whitepaper very carefully, and actually noticed a couple of red flags. First, the token didn’t have its maximum supply cap or a transparent supply schedule. Second, no valid economic incentives were introduced behind the native asset, and the sources of demand were rather unclear.

Third, the goals of the project were vague: it’s not clear whether Clover Finance was intended to be a ‘migration layer’ for De-Fi applications transitioning from Ethereum to Polkadot, or a standalone DeFi application. And finally, despite my admiring the ingenuity of Polkadot creators, it’s debatable if the network can ever become a sound alternative to Ethereum. The London hard fork has largely improved the congestion situation, and Ethereum 2.0 is going to utilize the same parallel processing system Polkadot does now.

The moral here is simple — I believe a cautious investor would think at least twice before investing in Clover Finance: a decision that might have saved their money.

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