The Guardian Project: The Key to Institutional Adoption
Last week, we witnessed major financial giants such as JPMorgan and Citi embarking on tokenization projects in collaboration with Avalanche.
We are aware that corporations have been leaning aggressively toward tokenization in recent years. However, when we ask why now and why Avalanche, the answer leads us to the Guardian Project published by the Monetary Authority of Singapore (MAS).
The Guardian Project is a project contemplating how the existing banking system can leverage DeFi technology. Despite previous tests conducted by giants like SBI and Standard Chartered, what will happen on Avalanche holds a special significance. This is because, for the first time, tests will take place on a decentralized and publicly accessible blockchain network like Avalanche.
If the Guardian Project succeeds, we will have a system that can implement international banking standards but operates on blockchain and with tokens. In other words, our created decentralized finance could become a serious player officially integrated into the mainstream economy. The goal of broadening the reach to the masses, as heard in terms of Mass Adoption, is not achievable without infrastructure. With the Guardian Project, companies managing trillions of dollars could bring extensive liquidity to the sector. The trust gained through the names of these companies and the liquidity they bring could potentially lead to the adoption of crypto by millions of new users.
Guardian Project
Looking at the report prepared by MAS in general, discusses the advantages and disadvantages of private and public blockchains. The main objective is to explore how these two types of networks can collaborate and maximize benefits.
Public networks are noted for their success in reaching a broad user base and relatively leading in terms of transaction volume. It is also mentioned that cross-chain bridges can be established more easily. However, liquidity and regulation issues are identified as the weak points of public networks.
On the other hand, private networks minimize liquidity and regulation issues. Yet, due to regulations, it is challenging to reach a wide audience, and cross-chain integration is subject to various permissions based on these standards.
What can be done?
- Having an open and interoperable infrastructure
This is one of the reasons why Avalanche was chosen. Previous tests were practically beneficial, but they did not involve the use of publicly accessible networks with a wide participant base. The bridges Avalanche has with other networks are also ideal for testing.
- The importance of managing a reliable, independent infrastructure with trusted players
It is emphasized, referring to the inevitability of centralization in this field. The creation of central and independent blockchains under the Avalanche Subnet within the main network makes this point valid.
- The ability to hold tokenized assets
It is available in both Avalanche and JPMorgan’s Onyx network. The need for tokenized assets arises from the desire of such large companies to benefit from their own products rather than assets specific to crypto, such as BTC. The real liquidity is expected to come from these products.
- An infrastructure open to regulation to minimize market manipulation and operational risks
Subnet rules can be set as desired for regulations. For example, rules like validators being from a specific country, having a specific license, or KYC requirements can be implemented. In short, regulation issues can be resolved because features specific to centralized networks can be integrated.
In summary, it is observed that an infrastructure aiming to tokenize banking standards is being developed. This way, the goal is to launch products within existing regulations without dealing with new laws and definitions, similar to the SEC. This implies that, if successful, the project can be quickly implemented in practice.
The visual below represents an example system from the original project. Many crypto players are involved in the JPMorgan-Avalanche collaboration, with each being selected for different categories in this system. The abundance of crypto players is one of the important aspects that make this collaboration significant.
1- Access Layer
This is the outermost layer of the system, where users interact, and it serves as the visible face of the platform. Categories such as who can access platforms and who can benefit from which services are present in this area. I believe JPMorgan’s agreement with Wisdomtree and Apollo may be related to this layer.
2- Service Layer
This layer contains smart contracts and facilitates payments, lending, borrowing, and trading operations. Layerzero and Axelar may have been selected for operations in this section.
3- Asset Layer
This layer is where the actual assets are held, and it is related to custody services. This part is likely directly provided through JPMorgan.
4- Platform Layer
This is the fundamental part where transactions are executed and finalized. Avalanche takes the lion’s share in this section through subnets.
I made the categorizations of companies based on my assumptions, and they may be incorrect.
In addition to the mentioned companies above, there are also those selected for blockchain technological support, which I assume will generally assist in all four stages. Avalanche, Oasis Pro, Provanence Blockchain, and Biconomy are among the companies with agreements in this area.
BSI Standards
One of the major issues pointed out by Guardian is the commitment of banks to international BSI standards. These standards come with various regulations, and their implementation in blockchain is often challenging.
This is actually the key factor necessitating a centralized network. Alongside international standards, each country has its own regulations, requiring additional adjustments accordingly. Subnets providing features such as KYC and licenses are precisely what Guardian wants to address this issue.
One purpose of regulations is to establish accountability, knowing who is responsible in case of any mistakes, etc. Cryptocurrency faces serious challenges in this regard. For instance, a user who sued Uniswap lost the case because the judge stated that the platform operates with smart contracts, and Uniswap cannot be held responsible. In a similar situation, Tornado Cash was found guilty and sanctioned.
To avoid such problems, it is crucial to identify those who control and approve the network. While Avalanche is decentralized, the ability for subnets to have centralization fulfills the responsibility requirement. It allows for clear determination of which player is responsible for which area.
Citi’s collaboration with Avalanche specifically aims to test FX transactions. In this partnership under the Guardian Project, the goal is to make transactions more efficient through blockchain. For instance, issues like the 1st and 2nd banks approving and recording a transaction in a compact process, while the 3rd bank faces problems and cannot record, can be addressed through blockchain, as mentioned in Guardian.
It is emphasized that blockchain enables a more real-time and reliable infrastructure, especially in FX transactions. The amount of collateral in transactions can be eliminated, but it is noted that this system requires liquidity. Even in a bullish market, the liquidity of crypto remains relatively small compared to traditional markets. This is where the need for collaboration with financial giants arises.
In conclusion, I believe we are at a crucial stage in the adoption by the wider masses. The leadership in this area is highly valuable due to Singapore’s role as a financial hub. The testing of Guardian with crypto players indicates that companies in the industry are becoming more professional and establishing a certain standard. The smooth progress of tests, the arrival of the next wave of users to crypto, and the increased liquidity should be a common aspiration for all of us.
