Part 1: Introducing #DeFi for Corda Enterprise Networks — Fast, Scalable, Compliant
What is DeFi?
An ecosystem comprised of applications built on decentralized networks, permissionless blockchains, and peer-to-peer protocols for the facilitation of lending/borrowing or trading with financial instruments. — Binance Research (Calvin & Etienne)
Decentralized Finance is poised to become one of the most disruptive, applications of DLT/Blockchain technology. At its core, the concept is implementing financial services and products without the need for an intermediary, or custodian — and as a result, often reducing or eliminating manual processes and overhead costs. For more general information on DeFi Binance has a great primer here.
This blog will briefly introduce applications of the typical DeFi space, and how a consortium can utilize these same financial mechanisms on the permissioned Corda platform.
- It will show how Corda can be used to build the next generation of B2B financial products.
The DeFi movement has enjoyed a lot of press and anticipation for several years. However, it was only the introduction and adoption of stable-coins (digital assets often pegged to, and backed by a real-world asset — in many cases the USD) such as Dai, Tether, or PAX; that shuttled this class of Dapps to a meteoric rise in popularity on the public chains.
- In Corda, the need for a backing pegged asset is not a necessity for transacting in a decentralized manner because the obligation of any issued asset is tied to a verifiable, and trusted network identity — allowing pure and fluid exchanges of relevant assets. DeFi is enabled by design.
$1 Billion — $9.5 Billion in 90 days. The untapped enterprise potential.
Activity in DeFi can often be measured using TLV (total value locked), as the majority of services employ a strategy of freezing assets with code (rather than custodian) to fulfill contract terms. An example of this would be securing collateral on a peer-to-peer loan, or holding the full value needed to exercise an option in a derivatives space. Because many first-gen DeFi applications exist on public blockchains, we can get a holistic view by summing TLV over a range of solutions.
That is not a speculative or mock graph; that is publically verifiable historical data on how fast and hard DeFi is taking hold of both investors’ money, and their imaginations!
Note, the majority of DeFi transactions today satisfy personal investments. The next logical step is to encourage and foster the same activity in a regulated, trusted, enterprise space — allowing solution architects to cater to the need for secure, high value, large scale B2B transactions.
- Corda is an established and trusted platform already in use by enterprises in verticals such as capital markets, insurance, energy, trade finance, and more. With a thriving ecosystem and growing adoption, DeFi CorDapps can be easily deployed, leveraging existing business relationships to allow participants to quickly realize benefits. The Corda Network, a global managed-network consisting of a variety of business verticals (in the form of Business Networks), allows CorDapp developers an additional vehicle for creating and deploying intra-industry solutions that scale!
What are some popular DeFi applications/use-cases?
Some of the primary domains where the benefits of decentralization are currently being applied are:
Prediction Markets | Derivatives | DAO (Decentralized Autonomous Organizations) | Insurance | Exchanges and Liquidity | Credit and Lending | Stablecoins | Infrastructure | Banking and Payments | Asset Management | Marketplaces
These domains are just a snapshot. Additional use-cases are sure to arise quickly as enthusiasm and benefits continue to push the boundaries of DeFi.
Here are a few notable examples of current DeFi non-enterprise solutions:
Cryptocurrency Exchange Platform (Exchanges and Liquidity)
Users can directly exchange tokens at near market rate using an open-source mechanism called “Automated Market Making”. Users can also deposit into the Uniswap contract to become liquidity providers.
DeFi advantage — A traditional exchange is run by a third party to create matches, set-rates, and temporarily escrow trades. Removal of this intermediary allows large cost savings and more transparency on rates and performance.
- Corda Enterprise Analogy — A ‘Uniswap’ for business can be created with a combination of a standard DvP (delivery vs. payment) flow in Corda and the inclusion of a rate-calculation flow, which could be market-driven or an off-ledger attestation via a Corda Oracle service. This solution would give B2B participants rapid, peer-to-peer liquidity.
Group savings platform (Banking and Payments)
Participants can contribute stable-coins to a common pot. At the end of the month, a selected participant wins all interest and all others have their initial deposits refunded.
DeFi advantage — Group savings arrangements are common in many regions of the world. Notable examples include SuSu and Pardner systems. However, current implementations rely heavily on centralization — causing size and geographical restrictions among others. Having criteria defined in code allows access to these financial services for a larger number of individuals who may not necessarily know each other.
- Corda Enterprise Analogy — A ‘PoolTogether’ CorDapp implementing a revolving pot may not seem like the typical B2B arrangement but it can easily be accomplished. You can use Tokens SDK to define an evolvable state with a list of maintainers (parties charged with allocating investment or interest-bearing selections as well as approving on-boards). The agreement contract paired with a ScheduledState or recurrent flow can execute timed payouts. Want to go fully-decentralized without ‘maintainers’? With just a few lines you can move participants as active maintainers and implement vote-based maintenance (equivalent to MultiSig). This solution (or inspiration of) would give B2B parties access to excess capital against a staggered calendar — perhaps opening up increased production capacities not available alone.
Lending and Borrowing Dapp (Credit and Lending)
Users can borrow crypto assets by staking collateral in an alternative asset — allowing settlements and utilization of assets they don’t own. Lenders can put to work their held assets by depositing into the protocol and earning market-driven interest rates.
DeFi advantage — This is a replication of a traditional money market. Money markets are generally used by corporates and institutions for short-term borrowing and lending. Decentralization can reduce transaction costs, which in turn would increase viable transaction scenarios and drive participation. Open, protocol-driven interest rates and code-locked collateral offer security to all parties.
- Corda Enterprise Analogy — reserved for later deep-dive (to be explored in Part 2 of this series).
Elastic Supply Cryptocurrency (Stablecoins)
With the implementation of programmable money, YAM attempts to reach price stability through elastic supply and community (contract facilitated) governance. Initially pegged to the USD, (and reserve backed by a high-yield USD stable-coin), the YAM value will flex with community activity. A portion of each supply expansion is used to increase backing reserves.
DeFi advantage — Centrally managed currencies, whether fiat or crypto, suffer from the implementation of potentially destructive monetary policies and outcomes such as inflation. Many cryptocurrencies address such issues by introducing scarcity (fixing supply) and limiting governance. Additionally, lack of fiat reserves in traditional cryptocurrencies compounds instability reduces liquidity, and discourages participation. A hybrid decentralized approach: elastic supply, on-chain staked governance, and stable-coin USD reserve; creates the potential for high efficiency and fluid digital assets.
- Corda Enterprise Analogy — The ‘Yam’ is a layered solution. It’s best to build it up in stages. First and foremost this is a token issuance. Using Corda Tokens SDK enables the rapid design of the basic digital asset. Programmable money is achievable on Corda through contract constraints which guide the evolution of the token via transactions. You can choose to activate compulsory monetary policies (previously difficult in fiat to induce holder compliance) — such as negative interest rates. Corda has a strong track record and active research in this area primarily in the realm of CBDC (central bank digital currency). Lastly, we have the decentralized governance of ‘Yam’. Token definitions on Corda easily evolve via authorized maintainers lists. Your governance protocol can employ any manner/degree of decentralization — Corda is completely flexible. Just a few possibilities would be delegation via approved maintainer-node Accounts SDK voting; or an adjacent fungible governance token implementing a POS; or even global token-holder Multisig!
Enterprise DeFi — The power of Corda Permissioning
So far we’ve covered; what DeFi is, the areas of financial services currently being reimagined/reinvented, and a few popular public blockchain DeFi Dapps already deployed. Now, let’s take a look at a Blue Ocean — DeFi in Enterprise DLT/Blockchain.
As stated, the same value and advancements being leveraged on a permissionless blockchain network by trustless peers can be translated to facilitate financial-services and products in B2B consortium spaces. DeFi can transform processes, enhance trust, and promote participation in Enterprise networks; whilst improving throughput, reducing costs, and opening new and safe regulated markets.
Enterprise Blockchain Market Will Hit $21.07 Billion by 2025 — Fortune Business Insights
Permissioned networks have unique properties that streamline enterprise agreements. It is well known that permissionless DeFi solutions currently face challenges that limit their suitability and restrict their latent potential. The educational arm of Binance lists the following as key challenges to DeFi:
- Poor performance
- High risk of user error
- Bad user experience
- Cluttered ecosystem
From the perspective of Corda (a permissioned privacy-by-default DLT) we can see that these challenges are mitigated by design.
Performance — Public blockchains employ global records, generally synchronized by a combination of gossip protocols and proof-of-work consensus mechanism. This hard locks transaction throughput. Corda was built ground up to maximize TPS scaling through the use of Notary consensus and peer-to-peer confirmations involving only relevant parties. (Find out more)
High risk of user error — In the permissionless ecosystem “code is law”. This is necessitated by the need to create deterministic results across pseudonymous identities. There is no implicit off-ledger recourse or real-world analogy to handle errors in process or interpretation. A permissioned network like Corda, follows a paradigm of “law is law” where digital representations are first and foremost transactional agents for REAL-WORLD activities. This mitigates risk, by enabling all the legal mechanisms for resolving user error (off-ledger arbitrations through verified identities, etc). Additionally, unlike a public smart-contract where the same transaction logic is forced among all participants; Corda decouples the transaction proposals from the means used to create them. What this means, is that its common practice for companies to implement their own unique and custom safeguards prior to approving transactions.
Bad user experience — Participating in public DeFi places an onus on the end-user to have the capability and experience to interface with the deployed protocol. Complexities include; setting up and managing a wallet and private keys, finding/trusting a reliable front-end mechanism for interacting with data, having a means of final settlement through identity on an exchange, and managing both investment and linked stable-coins. Corda Enterprise DeFi simplifies end-user experience by; shifting DLT management concerns from end-user to Node services through simplified APIs, allowing pluggable integration into existing enterprise solutions, consortium level consensus on a CorDapp’s contract constraints and state definition, and bespoke per-party customization on the same CorDapp’s workflow. Each company can define and curate their own user experience with minimal overhead and full privacy.
Cluttered ecosystem — A primary concern in public DeFi is the lack of audited and secure financial products (see YAM implosion). Anyone in the world can anonymously deploy a new protocol or contract onto the main-chain. This creates issues in trust, inconsistencies dealing with locked collateral, and miss-matches between user-need and application utility. In regulated industries and secure enterprise, conformance to established procurement procedures is a safe-guard protecting both companies and their stakeholders. Corda gives full control of a consortium’s experience to the network operators and participants. Deployed CorDapps can be whitelist enforced, every version of a DeFi CorDapp jar (executable) is signed. Relevant parties can pre-audit any solution BEFORE installing for use on their corporate node. This assures enterprise activities are optimized, secure, and adhere to any required regulations.
In the next installment, we’ll take a look at a specific DeFi CorDapp design, introducing patterns and flows to allow seamless B2B decentralized transactions. Stay tuned! 📺 🚀
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— Anthony Nixon is a Developer Evangelist at R3, an enterprise blockchain software firm working with a global ecosystem of more than 350 participants across multiple industries from both the private and public sectors to develop on Corda, its open-source blockchain platform, and Corda Enterprise, a commercial version of Corda for enterprise usage.