Achieving DeFi’s Holy Grail
Real-Time Gross Settlement, High Throughput and Long-Term Storage On The DAPP Network
TL;DR
- DeFi has exploded from just an idea into a sector with over $1 billion locked in just a couple of years. Yet, it is still very early for DeFi and the system must evolve if it hopes to transform global finance.
- On March 12 and 13, skyrocketing gas prices pushed Ethereum fees to reach $1.2 million over the 2 days, costing millions for some companies and highlighting the resource constraints base-layer blockchains must overcome in order to provide a resilient home for DeFi Apps.
- DeFi dApps building on the DAPP Network can remain unaffected by congestion or network fees and support significantly more transactions, all of which are documented on-chain and recorded in an abundant long term storage solution.
In just a couple of years, DeFi has exploded from just a concept into a sector with over $1 billion locked in smart contracts at its peak earlier this year1. From derivative markets to lending platforms and insurance contracts, financial functions that were once the sole domain of banks are being reinvented as trustless, transparent decentralized applications (dApps) on the blockchain.
While the innovation coming out of the DeFi sector continues to impress, DeFi must grow into a reliable system that does not sacrifice robustness and high-capacity to decentralize if it is to capture market share outside of the blockchain industry. When it comes to traditional finance, customers have full confidence that their transactions will execute in an irreversible fashion. Banks, insurance companies and investment brokers have a fiduciary duty to their customers and can be held legally accountable if a transaction does not execute in a pre-agreed upon timeframe.
DeFI must provide similar execution finality and reliability if it is to grow into a credible alternative. The challenge with DeFi transactions is that they require resources, such as gas on Ethereum, in order to execute on a public network. When times are normal, networks allocate resources fairly efficiently and the experience for DeFi customers is a rather smooth one. During periods of network congestion, however, the demand for free resources on the network skyrockets while network capacity drops, leading to costly transactions with unnecessarily long confirmation times.
This was the case during March 12 and 13, when demand for network resources pushed Ethereum fees to reach $1.2 million over the 2 days — which is more than 6 times the 2020 average. Many DeFi dApps stopped functioning properly as a result, leading some users to lose sizable sums of money.
(For a deep-dive into the catastrophic losses that resulted from network congestion on ‘Black Thursday, read White Rabbit’s excellent analysis into the matter.)
For DeFi to transform the legacy financial system, dApps must be liberated from network congestion and other constraints in order to provide a reliable experience that is no different from traditional finance.
#DeFiDAPP #DAPPNetwork (Click to tweet!)
Three Components Essential for A Scalable DeFi Industry
DeFi has grown into a dominant sector and with good reason. It promises to do away with the archaic bureaucracy and annoying fees that often characterize the banking system. Furthermore, DeFi is creating a financial system that is more inclusive and transparent, one that gives ordinary users access to services that were once exclusively available to a select few.
Yet, a DeFi system must consist of three components if it is to have a scalable impact not only on the blockchain industry, but on global finance as a whole.
- Real-time Gross Settlement: A record of every transaction that takes place is documented on-chain.
- High Throughput: The ability to handle a significantly larger volume of transactions than current capacity, even during times of congestion.
- Long Term Storage: Keeping a record of financial activity is crucial for risk-management, auditing and other financial functions.
Let’s take a look at these, one by one:
Real-Time Gross Settlement
In traditional finance, real-time gross settlement systems (RTGS) refers to financial messaging protocols that are capable of clearing and settling payments between banks on a per-transaction basis. If Bob sends $50 to Alice, and Alice sends $50 to Carol, a RTGS system will record the intermediate steps (i.e. two transactions made and three balances changed), as opposed to a net settlement system, which would only update Bob and Carol’s balance. RTGS systems enable instant settlement, thus facilitating predictable cash flows and real-time auditability.
Read more about Real-Time Gross Settlement in our CEO Beni Hakak’s article published in Yahoo Finance.
DeFi dApps that wish to enable this crucial characteristic of real-time gross settlement must contend with the inherent limitations of base layer blockchains blocking their path to scaling. One scaling approach popular in many communities is to create a network of second-layer payment channels that sit on top of the core blockchain, such as the Lightning Network on Bitcoin. Yet, while the Lightning Network is successful in expanding the capacity of the Bitcoin blockchain, it sacrifices real-time gross settlement to do so. Instead of broadcasting all of their transactions to the entire network, which would take time to process, Lightning users can open payment channels with each other, deposit an initial balance and send funds between themselves continuously. Only after a channel is closed do the parties broadcast the initial and final balances to the entire blockchain.
On the DAPP Network, every transaction can be stored on-chain even as the volume and velocity of transactions grow exponentially, preserving the benefits of RTGS systems on the blockchain. In this way, the DAPP Network enables a DeFi system that is indistinguishable from traditional finance in terms of reliability and speed, and works robustly in various economic climates
One way RTGS could be achieved is through LiquidChains, a blockchain-as-a-service solution that allows anyone to spin up a customizable chain in minutes and connect it to a public blockchain ledger for transparent record-keeping (if they so choose.) This way, DeFi dApps could execute transactions on a high-capacity, low-fee LiquidChains, while periodically updating the state of a public network. While the updates to the LiquidChain happen in real-time, periodic updates to a public network could enhance the auditability of DeFi dApps.
On the #DAPPNetwork, every transaction can be stored on-chain even as the volume and velocity of transactions grow exponentially, preserving the benefits of real-time gross settlement systems on blockchain.
By allowing dApps to run on application-specific chains while giving them the option of connecting to public networks, LiquidChains empowers builders with the best of both public and private chains.
High Throughput
DeFi dApps should be able to handle a high volume of transactions even during times of congestion. Yet, evidence shows that congestion periods on public networks make network resources prohibitively expensive for dApps, causing many to disrupt their service delivery.
Most DeFi dApps are built on the Ethereum blockchain and are constrained by the cost of gas and the availability of block space on Ethereum.
In addition to the aforementioned LiquidChains, all the services on the DAPP Network are geared at giving developers access to trustless functionality without compromising on throughput. One such example is LiquidOracles, the oracle functionality running on the DAPP Network. Oracles are essential for DeFi dApps as they provide them with access to real-world data and crucial price feeds. Yet, oracles that are based on Ethereum have to pay a gas fee every time they update their price feed, which may be insignificant in good times, but can cause catastrophic losses for DeFi users during periods of network congestion.
Meanwhile, dApps that use LiquidOracles can refresh their price feeds much more regularly, up to twice every second, all at zero gas cost and while maintaining full control over oracle sources. This allows LiquidOracles to perform regardless of the prevailing market conditions, unlike the Ethereum-based Oracle that froze under the weight of network congestion.
Utilizing LiquidOracles offers a number of advantages over other solutions. For starters, both the service-level agreements and the data accessed through LiquidOracles are documented on a blockchain-level. This allows dApps to verify both the integrity of the data they are receiving and the level of service delivery being provided by the DSP.
LiquidOracles is a crucial piece of infrastructure for DeFi companies like Equilibrium, who plans to utilize LiquidOracles to deliver accurate price information to EOSDT, its dollar-pegged stablecoin platform. Equilibrium is also making services available to other developers as a DAPP Service Provider (DSP) on the DAPP Network, creating a compounding innovation effect as developers can now seamlessly build on top of their services.
When it comes to decentralized applications, they are only as strong as their weakest link. Having access to high-throughput oracles that refresh twice a second can bolster DeFi dApps into reliable providers of financial services.
#LiquidOracles #DAPPNetwork (Click to Tweet)
Long Term Storage
Storing more than the basic amount of data on-chain is usually not a recommended practice. Whether its RAM on EOS, or storage and memory on Ethereum, the network resources available for data storage are scarce and should only be used for essential storage. Yet, for DeFi to transcend its current market and become a viable alternative to the traditional financial system, dApps need exponentially more storage capacity.
One reason for needing more storage is to perform risk management and stress testing. Banks, investment brokers and insurance companies make use of a wide range of techniques in order to identify risks and put necessary measures in place to mitigate them. These techniques require large quantities of historical data in order to model the past performance of an asset and use that to derive predictions as to how it could perform in the future. The more historical data a DeFi dApp has access to, the more accurate their risk management models can be.
The vRAM System running on the DAPP Network equips dApps with exponentially more storage capacity, without sacrificing on decentralization or speed. Such memory is required for running the Monte Carlo method, for example, which involves running multiple simulations of the future in order to predict how an asset could behave and prepare for the worst-case scenario.
DeFi’s Moment in the Sun
The COVID-19 crisis has brought the inefficiencies of the fiat economy to the forefront of the conversation. New money is being printed at an unprecedented rate, large corporations are once again on the verge of receiving swift bailouts and the unemployment numbers are skyrocketing worldwide.
This crisis is shining a light on the role of decentralized protocols in the global economy. Yet in order for DeFi to scale to the level of the traditional system, the infrastructure on which it is built must be robust, high-powered and reliable. For DeFi to construct a transparent, just financial system that works for everyone, the scalability and interoperability features of the DAPP Network must be infused into the financial applications of tomorrow. This way, DeFi dApps can be built to resist congestion and the state of fees on base-layer networks, becoming more resilient and reliable in the process.
- According to Data from DeFiPulse.com, there is currently $840mil in DeFi on Ethereum. By just adding the $208 worth of EOS in REX, a resource rental market, you get over $1b across two major public networks.
