Conflux Network
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Conflux Network

DeFi for Next Generation Blockchains

Part 1: How to Enter the Arena

Blockchain use cases are spread across domains from finance and insurance to supply chains and internet-of-things. In the last two years, we have seen the most disruption and traction of Web 3.0 technology in the Finance and Commerce sectors. Many of the applications in these sectors are trying to bring in legacy financial services and investment instruments to the open commerce world, along with innovating unique financial engineering instruments never seen before in history.

Bitcoin could be classified as the first Decentralised Finance application with a vision to become a peer-to-peer electronic cash system. But Ethereum is currently one of the most widely used blockchains for public chain use cases in the DeFi sector. It incorporates technologies like digital assets, financial smart contracts, protocols, and decentralized applications making it more versatile. Even though having dominance in the open finance space with strong community support, there are many challenges to Ethereum’s mainstream adoption.

According to DeFi Pulse, the total value locked in decentralized finance (DeFi) was around $1.2 billion in mid-February. The black swan event of March 2020 where the majority of cryptocurrencies including Bitcoin and Ethereum dropped significantly in value, affected the DeFi market negatively. This demonstrated a failure of the collateralised incentive model currently followed by most of the protocols, in the face of a severe network congestion and market sell-off. Since then, the total value locked in DeFi has dropped by more than 30% on all major platforms.

Poor scalability is definitely a bottleneck for achieving the level of speed and usability that the majority of the world is accustomed to — having run centralised digital finance applications for more than two decades. Another crucial factor which has hindered the larger user base and institutional investors from venturing into the DeFi ecosystem is the lack of liquidity. Cross-chain and pooling solutions are getting good traction. With a faster foundational layer it will open new avenues to make assets more liquid. Performance metrics around scalability and liquidity are essential for gaining customer interest and trust.

Opportunity for New Entrants in DeFi

The first-mover advantage has certainly helped the established networks and raised the bar for new entrants. There is a growing sentiment in the industry that for new blockchain networks it is unbelievably difficult to make a place in DeFi and compete against the established players. But there are many creative approaches to launch networks that are innately more faster and scalable or those that have niche value propositions. We can also see the technical vulnerabilities and the associated tech-debts that previous generation blockchain will bring along when improving on their status-quo to match the levels of technical sophistication of the next generation solutions.

To compete in the blockchain network race, Matteo Leibovitz coined the term ‘Distribution Quadrilemma’, which states main factors that new blockchain networks must simultaneously satisfy at launch to generate a premium. They are:

  1. Wide and equitable distribution broadly and fairly
  2. Potential for upside for the ecosystem participants
  3. Regulatorily compliant in major countries
  4. Revenue maximisation for the project

The first step to make a place in the emerging DeFi ecosystem is having technological superiority in addressing scalability and performance along with provisions for programmable PoW to limit mining centralisation from a hardware perspective.

Second step is to learn from the mistakes of the predecessors and designing better crypto-economic incentive models for miners and builders to encourage behaviour that leads to more network security and fair play.

There has been a shift in the regulatory environment as compared to when the first generation blockchains had launched and governments are now closely watching into the cryptocurrency domain and forming policies and regulations around the technology. The third step for a new network is to make sure the protocol is regulatorily compliant in focus markets. This will bring in more mainstream customers and increase user adoption that is beyond the usual crypto-tech savvy audiences.

Last and the most crucial step is to contend with the network effects of the established players by a strategic and focused go-to-market approach. This includes a clear narrative to the community about the strengths and differentiators. Finding the right use cases to tap is the key to gaining a foothold in the DeFi. Targeting specific markets or geographies for establishing the brand and utilizing the partner networks in the regions are some of the strategies that could heave to the first adoption curve and initiate the ecosystem building.

Open Commerce on Conflux Network

Conflux Network has designed a unique Tree-Graph consensus mechanism with a high throughput rate of 3000–6000 TPS. This is comparable in numbers to the centralised payment systems. With a unique proof-of-work algorithm, Conflux Network offers a fully decentralised and highly secure network.

The network’s higher throughput mitigates the concerns that the transactions do not get confirmed timely, which is an essential requirement for open commerce use cases with high-value assets being exchanged.

Along with higher throughput, Conflux Network is compatible with Solidity programming language, presenting a flat learning curve to the Ethereum developers who want to utilise a faster network for building and migrating DApps for achieving higher performance and improved incentives for users.

The economics of Conflux Network is engineered in a manner that there are unique incentives for every stakeholder in the ecosystem. There are more incentives for miners to ensure network security. Adapting faster block generation rates and allowing multiple blocks generated in parallel, Conflux Network inherently mitigates the disadvantages of small miners, thus improving overall fairness in the economic design. There are incentives for the token holders with voting rights in the network DAO, and for users to pay a much lower cost of transactions compared to existing centralised and decentralised alternatives.

Conflux Network is working closely with the Shanghai government through a government funded research institute and is planning to launch an incubator to support developers and startups in building decentralized applications on the public permissionless blockchain.

One thing is certain, Web 3.0 will not be a winner-take-all game. The industry will gradually shift and adopt decentralised technologies that are significantly better than the existing major players, both in efficiency and ethos.

In part two of this series — DeFi for Next Generation Blockchains, we will look at the topic of liquidity in DeFi.

Written by Conflux Network team member, Karan Ambwani

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