Why DeFi Needs a “Causal” Web 3.0 for Mainstream Adoption
Web 3.0 promises a continuous interconnected market where DeFi dApps can seamlessly exchange assets. The arrival of interoperable blockchains has made cross-chain DeFi a reality. Investors can exchange assets and value across their lending, staking, farming, and other financial services protocols across different chains.
It would be both disingenuous and erroneous to describe any kind of financial Dapp as wholly “decentralised” (that is not to say that that is a claim DeFi makes) as no such “100% decentralised” platform, interface, website or protocol exists.
However, if DeFi is not making this claim, which it (and its underlying technology) is not, then that leaves a pretty big elephant in the room — one that Decentr is dealing with as we develop our radically-new decentralised tech (platform + browser): if a so-called “DeFi” Dapp is not 100% decentralised then it leaves itself open to many of the third-party faults, failings and vulnerabilities of centralised finance — only without any recourse to a centralised authority or governance to rectify oversights.
DeFi, a peer-to-peer financial paradigm, which leverages blockchain-based smart contracts to ensure its integrity and security, and contains over USD $1.6Bn of capital as of June 2020. Yet as this ecosystem develops, with protocols intertwining and the complexity of financial products increasing, it is at risk of the very sort of financial meltdown it is supposed to be preventing — largely due to the fact it is not based on 100% decentralised protocols or tokenomics models that are sustainable mid to long-term.
Moreover, design weaknesses in DeFi protocols could lead to a DeFi crisis.
For example, over collateralised DeFi protocols are vulnerable to exogenous price shocks. We have quantified the robustness of DeFi lending protocols in the presence of significant falls in the value of the assets these protocols are based on, showing for a range of parameters the speed at which a DeFi protocol would become under collateralised — again, under collateralisation being a default concern of centralised protocols.
DeFi Dapps, of course, are not the only blockchain-based applications that struggle to maintain the integrity of their lofty, decentralised goals when building on foundational tech that is, to a greater or lesser degree, centralised. It is simply that it is when discussing DeFi applications in particular that the degree to which it is remiss to slap the term “decentralised” on any tech that is shoehorned onto a blockchain application becomes most pronounced: i.e., the accusation can be made that it is pedantic to quibble over the “real” semantic and lexicological scope of the word “decentralised” when referring to many of the vague, ill-defined and unworkable applications being built on blockchain.
However, this cannot be said of finance, as finance requires the terminology and tech that underpins it to be more robust to deliver very specific and precise outcomes.
With that in mind, to make sure we are using the same definition of “decentralised” (because it does matter at an important level above mere semantics) the Cambridge dictionary defines the word as meaning:
“To move the control of an organisation or government from a single place to several smaller ones.”
Therefore, when we at Decentr refer to “100% decentralisation”, this means the 100% removal of control from larger organisations to ever smaller organisations, which thus infers the process is only complete when the control rests at the level of the smallest entity in these organisations, and that, of course, in the wider decosystem is the individuals comprising it.
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The issue with DeFi (like any “decentralised” tech really) is this: you can’t have it every which way: DeFi is either a) minus any intermediary with something robust in its place that wholly does the job of this intermediary (and blockchain is not really up to the task), b) it is minus an intermediary with nothing in its place and it is unregulated anarchy or c) it is not really decentralised but a little bit “less centralised” than existing centralised applications (which is actually the definition of, er, “centralised”), and ripe for third-party interference and exploitation (as human nature will always dictate).
Current DeFi Dapps are, due to the flaws in the underlying tech, essentially, caught between “b” and “c” and is hence a precarious and unsustainable solution (in its present form) for wide-scale public adoption and enterprise level financial transactions, which is why it isn’t realising its enormous potential, either with the broader public, business or industry.
This lack of 100% decentralisation runs deeper in the context of defining a “true” Web 3.0 on which DeFi might be built and be sustainable in the mid to long-term.
Again it is a question of workable definitions leading to workable technology paradigms: the definition of Web 3.0, like DeFi, is vague and ill-defined: that’s fine: it, like DeFi, is a nascent set of technologies that needs time to mature: in general, Web 3.0 is considered to be a Web whereby “context over keywords” will be key in delivering better, more targeted information (in the same way that improved Web browsers, windows and search engines saw the shift from Web 1.0 as in “information dump” to a more contextualised resource).
The slow uptake of any real and dramatic Web 3.0 technology solutions is, in our view, because it is a distinctly uphill battle on an ever steepening incline to “contextualise” the current web: the laws of entropy simply do not allow for the race towards fractured and unstructured data that can somehow, in some undefined manner employing some undefined mechanism, move towards becoming structured without urgent and major intervention.
This intervention needs to be in the form of a set of truly decentralised web protocols whereby decentralised dataflow plus data storage by default begins to turn the tide in the direction of structured and refined, not unstructured and unrefined data.
Once that system is developed, then the foundational tech for a true Web 3.0 is in place; a Web 3.0 whereby not only human beings but autonomous artificial agents can begin to infer meaning from structured data and rapidly continue to refine and structure this data. (As the current net stands, any form of AI agent has cannot effectively distinguish “signals” from “noise”)
Solve that, then you have the basis for “true” DeFi because the robustness of the foundation tech and the immutability of the contextualised data — including financial data and the activity it describes — is a standardised, immutable, predictable and predictive. This is the tech we are building.
The solution as to how to build this tech is relatively straightforward (at least conceptually): to create a “true” Web 3.0 that can support true “DeFi” Dapps requires the creation of 100% decentralised Web 3.0 protocols — the definition of this being a platform that combines decentralised data storage with decentralised data flow (which is the platform + browser we are building).
A true decentralised Web 3.0 by definition replaces centralised institutions with a decentralised network of individual-users-as-nodes, each controlling the internet (and hence their finances and the collective financial assets and models that support the platform) at the level of the individual.
100% decentralisation gives this network 100% immutability and trustlessness based on the collective trust of community consensus as determined by applied cooperative game theory: in effect, true DeFi is the pure and untainted expression of market forces as driven and modulated by collective socioeconomic activity, determined at the level of individuals in this collective — minus the ability for third-party intervention, intentional or corollary, of any kind at any level.
In short, what needs to be borne in mind is that 100% decentralisation is not the diminishment of control to a shadow melee of faceless third-parties on an impenetrable matrix over which we all as users have no control — that is simply bad tech, and the stuff of soundbites that ignorant crypto haters, such as Paul Krugman, Nobel laureate Joseph Stiglitz et al, like to put out there to try and confuse the masses into accepting that the fragile and ultimately failed experiment of mainstream economics is the only alternative that can exist — as though it is somehow an immutable law of the universe.
100% decentralisation is the ultimate expression of DeFi’s aim to deliver user-centric financial services: Decentr achieves this by delivering foundational control of Web 3.0 into hands of every user so that the net functions for every user in precisely the way that every individual user needs and wants, when and how they want it, from the perspective of the targeted retrieval and contextualisation of relevant information. This information includes contextualised financial information, payments and trades as central to its outcome due to the fact 100% decentralisation repurposes 100% secure value itself as a payable and tradeable currency: a “perfect” circular economy.
How Singapore is looking at Web 3.0 and DeFi as it prepares for a digital Singapore dollar
Speaking at the Singapore FinTech Festival, Singapore central bank chief Ravi Menon announces the launch of Project Orchid, a digital dollar project.
The case for a retail central bank digital currency (CBDC) in Singapore is not urgent, but there could be potential benefits offered by innovative retail CBDC solutions in the future, said Ravi Menon, managing director of the Monetary Authority of Singapore (MAS), in a speech today at the Singapore FinTech Festival.
The MAS is partnering with the private sector on a retail CBDC project called “Project Orchid” to prepare for the possibility of issuing a digital Singapore dollar should the country decide to do so in the future, Menon said.
The MAS has partnered with the IMF, World Bank, Asian Development Bank, UN Capital Development Fund, UN High Commission for Refugees, UN Development Programme and the Organisation for Economic Co-operation and Development (OECD) on a Global CBDC challenge to develop retail CBDC solutions to improve payment services and promote financial inclusion. Fifteen finalists for the challenge, which include ANZ Banking Group, Ethereum software company ConsenSys and IBM, are presenting their solutions to an international panel of judges during the Singapore FinTech Festival.
No strong reasons for or against retail CBDC
There were neither strong reasons for or against a retail CBDC in Singapore, Menon said. “Physical cash is likely to be with us for quite some time more and so the need for a digital version of cash is moot at this point. The financial inclusion benefits of a digital Singapore dollar are not compelling. A high proportion of Singaporeans have bank accounts and electronic payments in Singapore are pervasive, highly efficient, and competitive. Possible currency substitution by foreign digital currencies is a remote tail risk at this point.”
Menon added that the issuance of a retail CBDC was ultimately a socio-economic rather than a monetary consideration. “The question is whether the public is comfortable with holding only bank deposits and whether there is public demand for a state-issued currency that is as safe as cash but in digital form.”
Aside from Project Orchid, Singapore is currently collaborating with the Bank for International Settlements and the central banks of Australia, Malaysia and South Africa on a wholesale CBDC project called Project Dunbar to design, develop and test prototype shared platforms for cross-border payments using multiple CBDCs.
Flexible regulatory approach
Singapore’s central bank chief also cautioned against cryptocurrency as an investment asset for retail investors. “The prices of crypto tokens are not anchored on any economic fundamentals and are subject to sharp speculative swings,” Menon said. “Investors in these tokens are at risk of suffering significant losses.”
Singapore refers to cryptocurrencies as crypto tokens and the country is emerging as a hub for fintech and crypto firms with its forward-thinking approach to lay down clear rules for crypto companies and a licensing regime primarily for money laundering and terrorism financing risks.
With the rapid rise of stablecoins, cryptocurrencies pegged typically pegged 1:1 to fiat currency and designed to minimize price volatility, Menon said the MAS was taking a flexible regulatory approach that would allow it to harness the potential benefits of stablecoins but could be tightened quickly.
The central bank was also keeping a close eye on Web 3.0 and decentralized finance (DeFi) developments. Web 3.0, where users can perform financial transactions directly with one another using smart contracts without the need for intermediaries, could also potentially disrupt the world of Finance, Menon said. “It is a fundamentally different approach to financial infrastructure, compared to the centralized systems of today.”
DeFi has the potential to bring economic and social benefits by replacing the need for intermediaries and bringing greater inclusion. However, it was not without its risks. “There have been some unsavoury practices in this space: ‘flash loans’ being used to manipulate prices in the market; bots being used to front-run retail trades,” Menon said. “With decentralized governance, who do you approach to recover lost accounts or reverse accidental transfers of money?”
Menon acknowledged the need to adapt existing regulatory frameworks with the rise of DeFi and to balance harnessing the benefits of innovation while managing risks. “We will work with both the financial industry and the broader ecosystem to find the right balance.”
The central bank, which has been facilitating experiments for blockchain and DeFi innovation through regulatory sandboxes, also announced today that it was enhancing its regulatory sandbox with Sandbox Plus to expand the eligibility criteria of the sandbox to include early adopters of technology innovation.
This theme for this year’s Singapore FinTech Festival, the sixth edition of one of Asia’s largest fintech events, is “Web 3.0 and its impact on financial services.” The weeklong event runs from Nov. 8 to 12 and will feature over 350 sessions and more than 700 speakers.
Cross-Chain Infrastructure to Go for DeFi dApps
Building a DeFi dApp for Multi-chain Ecosystems
Web 3.0 promises a continuous interconnected market where DeFi dApps can seamlessly exchange assets. The arrival of interoperable blockchains has made cross-chain DeFi a reality. Investors can exchange assets and value across their lending, staking, farming, and other financial services protocols across different chains. To meet the high demand for cross-chain DeFi capabilities, interoperable multi-chain ecosystems are forming in both a predetermined and ad hoc fashion.
The DeFi sector has taken a Big Bang approach to interoperability. Numerous interoperable blockchains and dozens of cross-chain bridges have launched over the last year. But which bridges will lead to the highest value creation for your DeFi assets?
Many developers are standing at a crossroads deciding which next-gen blockchains to build on. If you take the right bridge, all of your chains and dApps could communicate with one another in the future. To be part of this future, savvy DeFi dApp developers are not building on a blockchain but within a multi-chain ecosystem.
Cross-Chain Bridges at the Nexus of DeFi Interoperability
The first generation of blockchains do not talk to one another. You cannot send a Bitcoin transaction to Ethereum.
Interoperability is the ability of blockchain protocols and applications to communicate with one another and exchange value. Decentralized data oracles feed pricing and other data across the chains.
On interoperable chains, you can:
- Borrow assets on say Ethereum for collateral on other chains, Polkadot or BSC, on lending protocol Compound’s Gateway
- Earn yield on cross-chain assets from BSC, Ethereum, and Polygon on MantraDAO
- Back margin accounts and synthetic assets trading with Laminar’s cross-chain liquidity
The most popular way of enabling two-way communication to exchange assets across Interoperable blockchains is building multi-chain bridges. A bridge, for instance, could support inter-chain smart contracts across Solana, BSC, Polygon, and Ethereum.
Over the last few months, cross-chain bridges have started rising across the crypto sphere. The lion’s share of DeFi transactions have taken place on standalone blockchains. Bi-directional communication channels are rapidly opening with the rise of cross-chain bridges. Across over 100 active blockchains, 1kxnetwork reports over 40 bridge projects in development. A handful of operating bridges have over $7 billion in total value locked.
The whole is worth more than the sum of the parts. On cross-chain DeFi bridges, users can transfer tokens and extract more value from them — using them to trade, buy, sell, or collateralize assets over a wider universe of DeFi protocols. The possibilities are spawning innovation. More and more DeFi developers are collaborating on developing cross-chain functions across dApps.
The Multi-chain
Polkadot is popular with developers because the whole is the sum of the parts. Polkadot runs chains called parachains connected to and secured by a relay chain. Speed performance, for example, could potentially equal the aggregate performance of all blockchains running in parallel. The same parallelization concept supports infinite scalability.
As a multi-chain, Polkadot connects any Substrate blockchain to its relay chain as a parachain. All of the above blockchain examples are built on Substrate — a high throughput blockchain with cross-chain and WebAssembly for Web 3.0 support. This approach ensures that not only the infrastructures talk but the tools and programming languages used to build dApps are fully compatible. Bridges, in contrast, can grapple with many incompatibility issues across chains with different protocols, standards, architectures, and tooling.
Polkadot is the world’s fastest growing multi-chain. Hundreds of DeFi dApps have already been built for the Polkadot ecosystem where they are creating a flurry of partnerships to develop cross-chain services.
Because interoperability unlocks value and innovation across blockchain networks, developers are building the most DeFi dApps for these multi-chain ecosystems. And it’s no coincidence that the fastest growing dApp ecosystems are on the blockchains that also offer the highest speed and lowest latency — key performance attributes for DeFi traders. The world’s fastest blockchains — Solana, Polygon, Polkadot and Avalanche — all launched within the last year, also have among the largest and highest growth dApp populations.
Number of dApps by Blockchain
Total dApps 3635
Ethereum 2596
Binance Smart Chain 1500+
Solana 400+
Polygon 400+
Polkadot 200+
Avalanche 68
Building Interoperable DeFi dApps on ParaState
Since 80 percent of dApps are built on the Ethereum blockchain, an objective of many developers in cross-chain DeFi is Ethereum compatibility. The competition to be an Ethereum dApp is evident by the copycats on other chains where dApps advertise:
- Uniswap-style swap markets, or
- Balancer-style bootstrapping pools
So developers no longer have to compromise, ParaState has built an Ethereum virtual machine (EVM) that provides Ewasm (Ethereum WebAssembly) to build dApps for Web 3.0 on high performance Substrate-based ecosystems like Polkadot.
Using ParaState, dApp developers can directly port existing or create new Ethereum-compatible dApps for Polkadot, as well as other chains. ParaState shortens the dApp development learning curve and deployment time, which can be significantly higher for more complex next-gen blockchain ecosystems.
Once deployed on Polkadot, dApps gain access to an expanding multi-chain ecosystem. Many bridges are being built to provide two-way communication between Polkadot and external blockchains. The Equilibrium bridge, for example, supports bi-directional asset transfers between BSC and Substrate-based Polkadot and Kusama, providing support for BEP-20 native assets.
The ParaState bridge pallet is the fastest way to provide a parachain bridge to Polkadot for blockchains that run on Substrate. ParaState:
- bridges the application and developer ecosystems among Polkadot and Ethereum, as well as other chains seeking to provide Ethereum compatibilities
- provides an on ramp to parathreads on the Polkadot multi-chain through a cheaper pay-as-you-go model
- maintains Layer 1 security
- provides built-in DeFi infrastructure including lending protocols, DEX, and oracles
Meanwhile, ParaState’s SSVM optimizes the execution of smart contracts for interoperable blockchains. Developers can:
- easily drop dApps into a high performance smart contract environment by migrating and deploying Ethereum source code on ParaState
- develop and enforce standardized parameters for all members of a DeFi ecosystem as part of a multi-chain network based on SSVM
- provide autonomous consensus on a public blockchain that ensures immutability of financial transactions
- ensure confidential and private data within smart contracts based on the WebAssembly virtual machine and Layer 1 security
- program with ParaState in any language as part of a unified developer community for DeFi ecosystems, while domain-specific languages (DSL) can specify actions for specific participants
- create cross-chain dApps on ParaState’s Layer 1, which guarantees smart contract composability (dApps can interact and exchange assets)
As the growth in DeFi dApps shows, developers are building on interoperable blockchains and for maximal potential future value, open multi-chain ecosystems. The higher the level of connectivity, the more value dApps can extract. ParaState provides a way for Ethereum-compatible dApps to leverage the best of all chains operating in parallel on the Polkadot multi-chain.
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