Decentralized Financial System DEFIS

7 min readApr 21, 2020

DEFIS is a Decentralized Financial System of scalable, privacy oriented offchain smart contracts and financial protocols build on top of cryptographic primitives. Owners of different types of cryptocurrencies and assets can earn interest in DEFIS system, borrow, exchange and create custom cryptocurrencies in a decentralized mode.

Market problems

Financial services typically make about 20% of total gross domestic product in developed countries. It is a huge industry based on one thing: provide a trusted agents for transactions. Decentralized finance (DeFi) promises to provide various financial instruments without the need for intermediaries. Blockchain and smart contracts can replace most of the functionality of this industry, increasing profits for individual investors.

Traditional financial services provide an important service today, but at a very high price and the following fundamental issues are still unresolved:

Transaction costs are high for the average user of banking and financial services
Slow transactions, especially international ones
Excessive bureaucracy
Lack of transparency and unfair advantages for big players. Financial instruments are complex, and most people do not have access to information that would allow them to make optimal decisions
Inaccessibility and/or higher costs for people with low income. Financial services are simply not available in many places, and when they are, lower-income people are hit with even high fees (percentage-wise) than average

Fintech has been attempting to address these problems, with some success. Fintech solutions such as transfer services, investment apps and mobile money have begun to improve the situation. However, it still built on top of a system that fundamentally requires the overhead of trusted agents. Fintech can’t address the underlying issues of lack of transparency because it is dealing in the same financial instruments and going through the same major institutions as traditional finance.

For this reason, many investors have started to invest in cryptocurrencies. Cryptocurrency, by definition, has full transparency, which traditional systems simply cannot provide. In addition, a minimum amount of administration and bureaucracy is required. Most of the activities that were carried out by agents can be written into the code in decentralized financial systems.

Today, cryptocurrency investors have only one way to earn on their capital: rise of the crypto-assets. While this may be a good investment in the short term, but it’s not how is capital designed to work. Investments should provide a return on investment, and the cryptocurrency is designed to be similar to any other form of money. Investors today want to be able to borrow, invest and receive returns on their cryptocurrency investments.

Therefore, the market of Decentralized Finance (DeFi) is currently the fastest growing and most trending crypto-sector. However, the development of this market has revealed the technological limitations of existing systems and further development of the market is impossible without solving the following problems:

Lack of smart contracts scaling, which are the base of any DeFi application
Lack of smart contracts confidentiality
Excessive functionality of Turing complete smart contracts leads to errors, hacking and attacks.
Actual centralization of dApps, that do not have their own blockchain, and total dependence on the parent blockchain (uninterested third parties)
Lack of interoperability of different blockchains and crypto-assets
Problems of consensus regarding the mechanics of DeFi applications:
— Low scalability of networks with POW (Proof-of-Work) consensus. An example is the DeFi services leader, Ethereum
— Vulnerability of networks with POS (Proof-of-Stake) consensus. Example — all other blockchain platforms. Competition between DeFi services and the POS protocol itself (DeFi and POS stacking) will lead to vulnerability, attacks and centralization.

DEFIS solution

The project proposes the creation of the DEFIS system to provide Decentralized Financial services. The system is based on its own specialized blockchain with the ability to widely scaling of smart contracts and ensure the privacy of results from it’s execution. DEFIS technology provides necessary features for the DeFi services, solves it problems and eliminates the limitations of existing systems.

1. Smart contracts scalability

DeFi applications are based on smart contracts. Bitcoin, Ethereum and others different blockchains have a scripting language which is a way of describing under which conditions coins can be spent. These scripting languages allow to create smart contracts where coins can be spent under different conditions. Everybody in the network must downloads, everyone must verifies, so they can’t really be compressed or aggregated in any coherent or consistent way. Smart contracts actually end up being hashed, so they can’t really be compressed.

DEFIS blockchain does not support scripts at all. The entire blockchain functions on Schnorr signatures and Pedersen commitments that represent spendable coins. Our solution is based on the “Scriptless scripts” technology and our contracts can scale because the enforcement and execution of the terms of the contract happen off chain. By pushing this execution to the people that care about it, communal computing resources are spared the burden of storing contract data and executing terms and conditions. To have smart contracts using only signatures, we take advantage of signature aggregation within Schnorr. Aggregation is a property we get from Schnorr signatures because they are linear. This means they can be added and subtracted and the result is a valid signature corresponding to the same addition or subtraction of the public keys. The spending conditions are not enforced by the blockchain, but rather enforced by the parties themselves. Only once the parties within the contract agree that the conditions have been met will they collaborate and sign the finalizing transaction. To the blockchain, it looks like an ordinary signature and only the participants know what’s going on.

2. Privacy

Smart contracts privacy in DEFIS is provided by having the terms of the contract hidden from the public. The terms are known only by the parties within the contract, and visible data is indistinguishable from other transactions. DEFIS is fundamentally private itself. Blockchain does not store transactions, addresses. It operates on confidential transactions and uses a blinding factor that encrypts all inputs and outputs along with their public and private keys. Only two sides are dedicated to the details of the transaction. The secp256k1 elliptic curve, Pedersen’s commitment and Bulletproof, Schnorr’s signature and blinding factor, Dandelion ++ and CoinJoin — all these methods, cryptographic primitives and signatures work in a single bundle to ensure the highest level of confidentiality of the DEFIS system.

3. Smart contracts security

To date, a most number of DeFi applications have been built on Ethereum, Tron, EOS and many other blockchains with Turing-complete smart contracts, that have security flaws that allowed the attacks like DAO hack to happen (recursive call exploit). Most features of Turing-complete smart contracts not required for DeFi applications.

DEFIS being a dedicated non-Turing-complete smart contracts, based on Scriptless Scripts. DEFIS provides the basic required scripting functionality necessary to create even the most complex DeFi dApps (while at the same time reducing security related errors) and it can be easily tested for security flaws, because the language does not support any recursion or complex loops.

4. Decentralization

Most DeFi applications do not have their own blockchain and “locked” at the parent blockchain network. If there is an upgrade on the mainnet then all the DeFi ptotocols on this blockchain have to use this change even if they don’t want/need the upgrade.

DEFIS is running on its own blockchain, specialized for financial services and applications that require scalability and privacy at the top of primitive level. All decisions and updates are made by system participants in the interests of the project.

5. Interoperability

The decentralized wrapping feature is a main function in allowing users to hold any crypto-asset and performing investments in another cruptocurrency. DEFIS cross-chain protocols provides a mechanism for creating a pegged coins in DEFIS ecosistem, that is 1/1 backed by native coins.

6. POW vs POS

At Proof of Stake (POS) (alternative to Proof of Work POW) blockchain is protected by staked crypto-assets instead of by hash power. POS is increasingly becoming popular as the core consensus for DeFi blockchains due it scalability features. Multiple blockchain platforms like Ethereum, EOS, Cosmos, Tezos and etc has already adopted POS or has plans to do so in the near future. POS only works, if stakers are incentivized to stake funds. But if they can get better returns from the staking in DeFi services, they move funds from POS staking into DeFi. If this siphons demand away from the POS staking, the network becomes insecure.

DEFIS is built on a public POW blockchain and we have solved the scalability issue. To increase network scalability, we have developed the parallel chains architecture for network. The solution is Confidential Assetchains, where different chains can form a network of blockchains. This scalability solution connects chains together with the atomic swap protocol. On the core level, the funds can freely move from chain to chain with a lock/redeem system. These chains can operate on their own networks and will not be tied to the main blockchain, which solves the bloating issues of many other platforms.