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.

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.

$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.

TVL June 2020-Sept 2020 — Source: https://defipulse.com/

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.

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:

Uniswap

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.

PoolTogether

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.

Compound

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 advantageThis 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.

YAM

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 advantageCentrally 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.

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:

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! 📺 🚀

Want to learn more about building awesome blockchain applications on Corda? Be sure to visit corda.net, check out our community page to learn how to connect with other Corda developers, and sign up for one of our newsletters for the latest updates.

— 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.

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Corda / R3 | DevEx | DLT, Blockchain, Data, DeFi - @anthonynixon