Algorand Approach to DeFi — Advanced Assets & Contracts!
By Gokul Baby Alex on The Capital
Decentralised finance has captured the imagination of cryptocurrency evangelists and cryptoeconomics practitioners in recent times. It has created a niche space for itself in financial market and financial engineering discourses. However, it remains quite intriguing for someone not familiar with the convergence of decentralisation and finance.
The world of cryptocurrencies is going through a lot of ups and downs. We are at the dawn of a cryptocurrency revolution, and at the same time, we are hearing a lot of prophesies and predictions about the homecoming crypto winter! Even when we find those hues and cry quite hyperbolic, we can realize that there is a long way to go to reach a sustainable self-organized roadmap for cryptocurrency growth trajectory.
Decentralised Finance has become the umbrella term for describing financial services built on the top of public blockchains. At a glance, decentralised finance also called DeFi, can be understood as the paradigm leveraging open source software and decentralised networks to transform traditional financial products into trust-less and transparent protocols that function without intermediaries.
Before delving deeper into the emergence and evolution of decentralised finance, it is important to know that decentralised finance is a collection of concepts, philosophies, perspectives, tools, techniques etc. It is not just a meeting point of socio-economic decentralisation and financial models. It is an evolution of financial models and technologies in a physical and digital economy in a dynamic and decentralised pattern demonstrating various dimensions of emergent properties. It is essentially an emergent system which could manifest a lot of nascent behaviours in the times to come. Hence It is important to trace route various undercurrents in the world of finance and technology. This has contributed to the emergence of decentralised finance.
Algorand protocol has a distinct position in the Blockchain ecosystem. It was envisioned by the Zero Knowledge Proof inventor and Cryptography Proponent Professor Silvio Micali. It is fascinating to listen to him about the subtle approaches to Blockchain Scalability and Security through a simple blend of probability and randomness with a deft touch of game theory.
Algorand has strengthened the belief in public permissioned blockchain networks through pure proof of stake consensus algorithm. It has also established its engineering finesse through the design of a vault system.
Hence when Algorand protocol was launched, it was quite expected to see a collection of advanced cryptography and consensus features embedded in the Algorand framework. The entire framework of features and facets of Algorand is quite comprehensive! It may take years to see their full spectrum adoption in the protocol itself. What fascinates us is the careful calibration of these capabilities in a structured, mature, strategic and seamless manner.
You can validate these observations by seeing how Algorand has distributed and decentralised its components across different processes in the distributed computing architecture. There are separate daemons for key management, block management, communication management, API management, etc. Algorand is rolling out each and every feature with care and control. The manner in which Algorand has rolled out Standard Assets and Smart Contracts are a clear indication of their strategic approach. Algorand has designed some interesting features like unique digital signatures, verified random functions, etc.
However, it was quite inspiring to see how Algorand is building advanced assets, methods, and models for decentralised finance. Algorand Standard Assets have been designed with a structured view of the asset lifecycle with definite stages for creating assets, freezing assets, transferring assets, etc. Algorand Smart Contracts, on the other hand, are implemented in a transaction execution approval language (TEAL) that highlights the need for a secure, stable, and streamlined transaction execution model. Algorand Smart Contracts are implemented within a bounded and contextual manner. This ensures that the smart contract will posit minimum surprises and stability challenges making it quite suitable for non-fungible tokens, transactions, and marketplaces. All these models and methods are very important for DeFi. Decentralised finance requires a mature and modern marketplace around a cryptocurrency.
The world of decentralised finance consists of diverse platforms such as decentralised exchange protocols, stable coins, lending protocols, derivative protocols, bundling protocols, tokenisation protocols, fund protocols, KYC protocols, AML protocols, identity protocols, etc.
It is observed that lending protocols are one of the major uses of decentralised finance in the initial stages. Blockchain technology accelerates the adoption of peer to peer lending as it virtually eliminates the need for third-party verification in the loan application process mandated by traditional banks.
Stable coins are one of the other promising early use cases of decentralised finance. Stable coins are crypto assets that maintain a stable value against a target price. Stable coins can function as collateral. Stable coins are much more fixed than normal cryptocurrencies. Their values are pegged against other assets. As a result, stable coins provide many benefits of a cryptocurrency such as transparency, security, privacy, etc. without the perils of volatility. As reported by Consensys Media, there are 66 active and public stable coins in circulation. Of all the stable coins that have been launched 50% of them are on the Ethereum network. We have looked at the trendsetters of decentralised finance till now. Now let us try to understand the origins of decentralised finance.
It is interesting to see the differentiated value proposition of decentralised finance as distinct from the mainstream FinTech models. FinTech operates through traditional trust-based technology architectures coalesced with mainstream financial institutions. Decentralised finance inverts this structure with decentralisation of institutional processes and frameworks acting upon trust — minimized technology infrastructure. This is a remarkable difference in terms of the operating models of decentralised finance platforms and the mainstream FinTech platforms.
In the research report published by Binance, the famous cryptocurrency exchange, decentralised finance is defined as an ecosystem comprised of applications built on decentralised networks, permissionless blockchains, and peer to peer protocols for the facilitation of transactions such as payments/lending/borrowing or trading with financial instruments.
Even at the basic transaction level of payment systems, decentralised protocols and platforms are positioning as a counter-discourse to centralised payment platforms in transaction fees and transaction modes.
Algorand targets advanced and accelerated marketplaces and monetary models even in the early days. It is quite interesting. This is a very interesting and inspiring trajectory for all cryptocurrencies with high aspirations and aggression. I wish all the very best to the community of engineers, economists, evangelists, and entrepreneurs of Algorand ecosystem!!