Complementing DeFi Practices: Unika Use Case
The blockchain ecosystem keeps growing and evolving and it means that new segments of its decentralized infrastructure are also arising and developing. One such sphere is Decentralized Finance (DeFi) which stands for a financial technology resting on distributed ledgers functioning similar to the ones used by cryptocurrencies. DeFi is a catch-all term for the existing combination of peer-to-peer (P2P) networks, community-led structures, and algorithms enabling the enhancement and creation of various financial solutions. It seized the crypto industry in 2020 and sparked numerous tools, including lending protocols to democratize the world of cryptocurrencies for everyone.
The main goal of DeFi is to challenge the existing centralized financial system, which is made up of traditional financial institutions such as brokerages, banks, credit unions, and governmental lenders by allowing blockchain users conduct peer-to-peer digital exchange operations.
Unlike traditional banking and financial services, DeFi doesn’t charge fees for digital transmissions. Through DApps, blockchain protocols, and platforms users can trade, lend, and borrow knowing that all their actions are recorded in distributed databases. Having a decentralized nature, such databases could be accessed from various locations. They aggregate and collect data coming from users and apply a consensus mechanism to verify transactions.
Despite a decentralized, transparent, and automated nature, DeFi protocols and platforms sometimes could be fraught with risks, which are predominantly understudied.
Top 3 Threats in DeFi and the Way Unika Eliminates Them
1️⃣ Protocol Risks
In case of a malicious attack, there is a possibility to alter the DeFi protocol execution. These could be flash loan threats, attacks that take advantage of some bugs existing in the logic of smart contracts, which are the driving force of the DeFi ecosystem, or oracle manipulations. The example of Cream Finance DeFi protocol $130 mln loss due to the flash loan attack, clearly shows that once attackers understand the way smart contracts operate, they can manipulate the shortcomings of a contract and benefit from it. The most vulnerable platforms for such attacks are crypto lending service providers with no collateral and verification.
Unika is a decentralized identification protocol allowing anonymous identification based on biometric user data. Once identified, the individual can connect an unlimited amount of blockchain addresses to their identity. In case of an attack, Unika could help the DeFi service provider to identify attackers and ban any of their existing or forthcoming blockchain addresses from operating on the platform.
2️⃣ Governance Risks
Decentralized governance proposals, which are the unique aspect of DeFi, control the way DeFi protocol operates. The means of DeFi protocol control is the governance token being distributed among DeFi users. In this way, the governed DeFi sphere could face similar threats and hacking issues as DAOs. As an example, we can use the governance attack on Beanstalk Farms which cost the company $182M. The attacker purchased a controlling stake in cryptocurrencies and instantly voted to transmit all the funds to themself.
Unika could protect governance DeFi protocols from being misused by malicious participants and improve protocol resilience. In the case of Beanstalk Farms, if partnered with Unika, the owners could have been alerted about the user with no reputation within the system trying to seize the controlling power over the protocol. Or at least, it could have been much easier to track the attacker, because upon the company’s request, Unika would be able to provide to the service other users’ blockchain addresses registered with the same identity.
3️⃣ Sybil Attack Risks
Sybil Attacks go hand in hand with Airdrop practices, and by a lucky accident, DeFi quite often uses Airdrops to launch tokens and reward early users of DeFi protocols. The fact that malicious users create fake accounts to get more funds for free, is only half of the problem. Based on the CoinDesk investigation report, there is at least one confirmed case (Solana project), when attackers used multi-accounting to imitate the community growth, with the only idea to exploit Solana users’ wallets and drain the funds much later.
Unika advocates for the principle of ‘one user — one drop’ and it helps to make sure that during the Airdrop only users with confirmed unique identities participate in the token distribution. It means that the DeFi protocol with the help of Unika identification procedures could create Sybil-free lists of users for Airdrops and, eventually, build a community that shows honesty and genuine interest in the project and its achievements.
Unika Pioneers Crypto Lending Facilitation
One of the key functions of DeFi is borrowing and lending crypto-assets or exchanging crypto for goods and vice versa. Nowadays, various crypto lending tools operate on several blockchains, and to get crypto or fiat users normally have to provide collateral. A collateral loan is a type of loan practice when users have their assets locked proportion-wise to collateral or even higher. Sometimes the borrowing entity should be able to provide up to 3 times higher than the sum taken as a loan. The existing problem of crypto loans is the lack of mechanisms that might help users to reduce the collateral based on their good credit history in Web3. Another issue that is making crypto lending uncomfortable for some users is the inability to transfer identity objects, including the credit reputation, from one blockchain to another thus enforcing users to start their journeys to the trustworthy status from scratch if they want to take a loan in another blockchain.
Unika blockchain-agnostic nature secures smooth interoperability between different DeFi crypto lending protocols across Web3 and may act as ‘an advisor’ for Web3 crypto loan service providers.
Implementation of Unika ‘Advisory’ Functionality in DeFi
💡 Unika Identification Procedure
First of all, a user should send a request to the Unika protocol for identification. The identification procedure as for now is a liveness check and the resulting biometric data is sent to decentralized encrypted storages. No ID scans are needed. Only you and your identity act as means of your digital presence in Web3. In the future we expect to add other biometric modalities, moreover, our solution architecture has this functionality by default. As a result of the identification procedure, the user’s unique identity is linked with the blockchain address used to initiate the request. If a user wants to add another address, they have to go through the validation procedure. As soon as Unika’s validating nodes confirm the identity a new blockchain address is added to the identified individual. The amount of added addresses is unlimited.
💡 Credibility Assessment
When a new user joins the Unika service, our protocol could use the existing data stored offline on a particular blockchain history of transactions to build the user’s credit score. The transparency of the blockchain ecosystem, which never forgets anything, considerably assists in it. Also, Unika’s ability to link users’ addresses could build a comprehensive credit reputation based on users’ loaning and borrowing activity across all Web3. It’s important to note that Unika protocol eliminates any attempts of any third parties, including Unika itself, to get access to users’ sensitive data without their concern. All manipulations with the private data are accomplished after users approve the request for these types of activities.
💡 Reputational Transfer
Trustworthy lenders identified by Unika and DeFi service providers that partner with us could be mutually beneficial to each other. The first (users) by neat and diligent lending and paying back the money on time facilitate the development of DeFi and the latter (DeFi) provide discounts in collaterals for users who have a good credit history. The advisory function served by Unika is to provide an answer to the question: ‘Is the user with X blockchain address trustworthy, or not?‘ Usually, such questions could be asked by lending platforms, and based on the answer, the smart contract either increases or decreases the collateral. Such a reputational transfer is plausible across blockchains.
Conclusion
Unika functionality as a decentralized anonymous identification protocol matches well with the DeFi segment of Web3 and in many ways can stimulate its further development by safeguarding DeFi protocols against attacks from malicious users. Unika is capable of building a transparent system of trustless mutual aid when users acknowledge that they are cooperating with real individuals just like themselves who care about their reputation and won’t hazard it in vain.
We would love to know your ideas about the future of DeFi development. Also, we would love to discuss options for our partnership and cooperation. Send us a line and follow our news!
