Beam Confidential DeFi Platform
Introduction
With the release of Eager Electron 5.0 version, Beam has mostly completed the set of infrastructure features making it the best confidential cryptocurrency in the world today. However, the Beam story is just getting started since the confidential transfer of value is just one of the many possible applications of Beam technology. In this article, we will outline the applications that will be developed on top of Beam platform during the second half of 2020 and throughout 2021.
We are building a platform that will allow developers to create confidential decentralized financial applications, using the building blocks described in this article, together with a variety of tools and APIs we will provide for this purpose.
Concepts
Before we dive into specific application types, we would like to provide an overview of several key concepts pertaining to our case in order to build common ground and avoid misunderstandings.
Decentralization: Centralized vs Decentralized vs Federated
Throughout the article, we will often mention terms like Centralized, Decentralized or Federated, and we would like to explain what is meant by each one to avoid confusion and many of the common misunderstandings. Centralized refers to a system, application, or asset controlled by one legal body. Federated means that control is spread over several bodies, a number of which is still small in comparison to the overall network size, say, the total amount of nodes or block producers. These bodies are assumed to be uncorrelated and have an efficient way of reaching consensus assuming some majority of them are honest. Federated bodies are almost universally ‘permissioned’ — meaning an agreement of the current members is required to join the Federation. In contrast, Decentralized systems are almost by definition ‘permissionless’ and are controlled by a relatively large and dynamic number of uncorrelated bodies, with no central authority.
In the context of DeFi, it is obvious that any representation of any real-world (i.e non-crypto) asset, can only be either centralized or federated. In fact, as of today, this is also true to many of the crypto assets as well, since contracts are in most cases controlled by a single entity, and often preserve some centralized control. The exact scope of this control might differ in each particular case and is supposed to be as minimal as possible through the process called ‘trust minimization’.
Wrapped Assets vs Cash Settled contracts
In the context of this article, wrapped assets represent asset classes that hold some actual amount of the underlying asset as collateral. Thus, for example, wBTC on Beam assumes there are some actual Bitcoins being kept somewhere and could be exchanged back and forth for their wBTC counterparts. For technical reasons on the Bitcoin side, the BTC lock can only be done in either a centralized or federated way, with some additional ‘trust minimization’ components.
Cash settled applications provide a representation of different asset types using centralized or federated oracles, but do not hold the actual asset itself. In this case, users can either trade contracts, such as CFDs (Contract for Differences) or cash-settled futures without the underlying asset changing hands.
Types of DeFi applications
As of today, DeFi applications mostly fall into three major categories: Lending, Synthetics and Decentralized Trading.
Lending
Lending is a broad category which includes various types of lending / borrowing as well as margin trading, liquidity mining and similar applications. In most cases the lenders would get dividends on the liquidity they provide to the market. The borrowers, on the other hand, will be able to use more funds to leverage their positions, either short or long in the provided currencies.
Synthetics
Synthetics generally mean the ability to represent different types of real-world assets using on-chain tokens. Such assets may range from stocks and commodities to various types of non-fungible asset classes such as real estate or other types of property. On the Beam chain, each asset is represented by a matching Confidential Asset type or CA for short (described in more detail below) and their relation to the real-world assets is handled using the Oracles.
One specific application of a synthetic asset are stable coins that are tied to a real-world currency, usually the US dollar. On Beam, this can be implemented either algorithmically by using collateralization, in a way similar to how Dai works or by moving over existing stable coins using custodial Bridges. Stable coins have gained a lot popularity recently and are used in a lot of financial applications.
Decentralized Exchange (DEX)
Both lending and synthetics are often used to execute a wide variety of trading contracts such as futures, options, long and short trading and a multitude of other financial instruments including many variations of derivatives. Decentralized Exchange (or DEX for short) is a platform that allows the execution of the above-mentioned contracts. Unlike centralized exchanges, the goal of DEX is allowing users to keep custody of the assets whenever possible and use trust minimized federated schemes in case it is not.
Amongst the different types of trades that can be supported by such exchanges are; taking long and short positions on various assets, Contracts For Difference (CFDs) and Perpetual Swaps, which are variations on the futures contracts without the predefined settlement date.
How does it work on Beam and what makes Beam different?
In this part, we will provide an overview of Beam DeFi infrastructure including the high-level building blocks we will provide to enable applications that were described in the previous section.
Beam Confidential Assets
Confidential Assets (aka CAs) were introduced in the recent EE 5.0 release. Any Beam user can now create a new asset type by locking 3000 Beam, thus becoming the *asset owner*. The owner can then emit or burn any amount of the newly created asset that belongs to that owner, an event which is openly visible on the blockchain and reflected in the blockchain explorer. If the owner controls all of the emitted asset, he/she can choose to burn all of it and unregister the asset type, thus getting back the locked deposit. Of course, if some amount of the new CA was transferred to other users, it can no longer be burned and thus it is no longer possible to unregister the CA for obvious reasons. The CAs inherit all the confidentiality and scalability properties of the original Beam coin, and are handled by Beam wallets. It should be noted that while individual transactions and holdings are fully confidential, the total supply of a CA can be seen on the blockchain.
Oracles
Oracles are an essential part of connecting blockchain applications to real- world events and financial data. Oracles are always either centralized or federated, at the moment no truly decentralized oracle architecture exists. This is not a major issue for most applications. Oracles serve as final arbiters on the contract settlements.
Scriptless Contracts
Currently the most popular way to implement DeFi applications is by running deterministic scripts called Smart Contracts on all nodes in the system and updating system state according to the results of their execution. These scripts are usually written in a special language that can be interpreted by the virtual machine built into each node. Furthermore, blockchains implementing Smart Contracts usually use account based models. How would it be possible to build such applications on Beam which does not have Smart Contracts and is UTXO based?
By now we thought we would get used to the magical properties of the Mimblewimble. We already saw it with Cut Through, Atomic Swaps, Laser Beam and Lelantus and this time it will allow us to build ‘Scriptless Contracts’ that would both allow transition between UTXO and Account model, and implement complex business logic. The secret, as usual, lies in the implementation of the transaction kernels, key enablers of the Mimblewimble extensibility. Just as in Lelantus, the kernels enable the transformation of UTXOs into system state and vice versa thus allowing contracts to operate.
The other part of the application logic takes place off-chain and is performed via exchange of SBBS messages between the wallets and creation of new types of transactions. The basic idea is that while the trade itself is formed off-chain in the form of a multisig agreement, the settlement and verification are done on-chain, thus making sure the eventual state of the system is always consistent.
The resulting architecture thus utilizes all of the Beam infrastructure including Atomic Swaps for locking non-Beam collateral, Laser Beam channels for instant payments where required, SBBS for all off-chain negotiations and ‘Scriptless Contracts’ to handle the application logic.
Sidechains
But what if you absolutely must have Smart Contracts? Or you want to use PoS consensus? Or both? Of course, it would not be possible to do that on Beam Mainnet without having to deal with a multitude of consequences. It would be, however, possible to launch a Beam sidechain in which these changes could be implemented and move assets seamlessly from Beam to the sidechain and back again using Beam chain interoperability contracts.
If a sidechain does not have a native token, any confidential asset, including Beam itself, can be locked on the original Beam chain and then reissued on the sidechain for the same owner. The moving back works in a similar way, the asset is burned on the sidechain and then unlocked on Beam Mainnet. The combination of the above allows to seamlessly channel trades between chains. If a sidechain has its own token, this token can not be moved to Beam, it can only be used within the side chain.
If the sidechain does have a native token, it can not be moved to the main chain, but the assets from the main chain can still be moved and traded on the sidechain against either other assets or the native token. Since both chains support the Mimblewimble protocol the trading will be seamless and provide the same properties of confidentiality and scalability as the Beam chain itself.
Bridges
Bridges are mechanisms that allow locking coins on foreign chains such as Bitcoin or Ethereum, and receiving their equivalent representation as Beam CA. Bridges can be either centralized or federated, with some trust minimization in case the original chain supports smart contracts.
The road to Confidential DeFi
Beam was always known for its innovation, speed of execution and attention to user experience. Beam Confidential DeFi will continue these traditions taking Beam to the next level and bringing usable confidentiality to the DeFi world.
Based on the building blocks we described above, the community will be able to build any number of DeFi applications with diverse functionality that will fulfill the growing need for confidential DeFi services. This year, we are seeing an unprecedented growth and interest in DeFi applications, and the trend will continue into the future. As a platform, Beam is offering all the DeFi capabilities, plus (and it’s a very important plus) full confidentiality of people’s operations and assets. The future of DeFi is confidential and Beam has what it takes to build that future.
Of course, there will be many technological and cryptographic challenges along the way, but the journey is looking amazing and worthwhile. In our next roadmap update we will lay out the essential milestones for the rest of this year and into 2021. In Beam, no matter how far we go, it always seems the best part is still to come.
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