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Neutrino: Welcome to the new world of DeFi

During the Waves Meetup in Berlin, Aleksei Pupyshev, the co-author of Neutrino Protocol a long-time evangelist of Waves platform and decentralised technologies, talked about the work that his team has done throughout the year.

Aleksei Pupyshev at Waves Meetup — “Neutrino: welcome to the new world of DeFi”

2020 is near, and it’s time to take stock of the work we have done in 2019. This year was busy: we developed an online course “Mastering Web3”, the first Decentralized Autonomous Organization on Waves Blockchain and, what’s most exciting, we launched Neutrino, an algorithmic stable coin protocol.

In 2019, a new and fast-growing trend, called DeFi — decentralised finances, has started to shape up. In this article, we are going to describe what place the Neutrino Protocol has in it.

DeFi is coming to replace or extend traditional financial services and products, which are familiar to and used by many:

  • Credit
  • Trading
  • Investments
  • Deposits (with interests)
  • Transfers
  • Payments
  • Foreign Exchange
  • Lending & Borrowing
  • Insurance & Hedging

The Venn diagram below has two intersecting circles — the left circle represents so called banked and documented countries and populations like US or EU, and the right circle represents unbanked and undocumented populations like Sudan or Afghanistan. The intersection between them consists of emerging countries such as China, India, Russia or Brazil.

The financial services described previously are available mostly in the left sector. On the right side, a huge market with huge demand of many people and organisations remains almost undiscovered.

In addition, even in countries where financial services are well-established, there are still many issues with using them. For example, most services demand that you uncover your identity, risk your privacy and share personal documents. There are usually expensive intermediaries such as banks/brokers or advisers. The entire process is centralized and almost never transparent. But most unpleasant is the fact that there are a lot of restrictions for becoming a client: restrictions by age, occupation, financial history, and even citizenship or residence or nationality.

Luckily, DeFi may be the democratic solution we all are looking for. As it is built on trustless decentralized networks with immutable storages, it gives everyone the ability to anonymously use financial services without restrictions and intermediaries.

The first DeFi product is of course, Bitcoin, the cryptocurrency designed in 2009 by an anonymous person Satoshi Nakamoto. After only a couple of years, we saw many new cryptocurrencies appear, such as Waves or Ethereum. However, most of those cryptocurrencies are not ready to be used in real world applications.

Since cryptocurrency is designed to be trustless and transparent, there is no specific determining price value for it. Because of this, the price of crypto tokens in fiat currencies such as the US dollar or Euro is determined by the supply-demand open free market nature. This means that most of the time the price is too volatile and it is almost impossible to use cryptocurrency as a value exchange medium within financial services. To change that, we need stable price currencies or stablecoins.

Some stablecoins are collateralised by large fiat deposits, such as Tether. The main problem with this approach is that those deposits are almost never transparent and require independent audits. As a result, this leads to the lack of trust and the disruption of the price stability.

However, a new, promising type of stablecoins is becoming popular which are called algorithmic stablecoins, such as DAI on Ethereum or USD Neutrino on Waves blockchain.

Neutrino allows issuing and redeeming of a crypto-collateralised tokenized asset pegged to a real-world asset via the information provided by a network of oracles.

The key principle of Neutrino is to achieve equilibrium between the capitalisation of a tokenized synthetic asset (for example, the dollar’s neutrino) and the capitalisation of collateral represented by a native token (such as Waves). If the price of collateral goes down, a special financial instrument is created: Neutrino system base token (NSBT). When the price goes up again, all NSBTs are liquidated in the proportion of 1 NSBT to 1 USD Neutrino. Traders can buy NSBT on the open auction and set the price according to their expectations. This process is needed to maintain collateralization and it makes the whole system more secure.

Some cryptocurrencies let their holders generate passive income. Most often it can be found within platforms that implement a special consensus algorithm called: Proof of Stake. Waves, for instance, has so-called leased proof of stake consensus mechanism, where mining nodes should attract token holders and ask them to lease some of their Waves tokens to increase miner’s block generating balance. The more generating balance a node has, the more chance of mining a new block there is. While a block is being mined, participants are rewarded by newly issued tokens and fees from the transactions in this mined block. The miner can then share this generated profit with its supporters (leasers). This process is called staking and it is an essential element of the Neutrino Protocol.

Neutrino can be staked to generate passive income, as described above. All rewards from staking can automatically be exchanged to the stable coin.

The first synthetic asset that we introduced is pegged to US dollar and is called USD-Neutrino. Users can easily swap and transfer USD-N tokens in the Neutrino dApp, decentralised application written in RIDE, a non-Turing Complete language for smart contracts on the Waves platform.

In the Neutrino dApp, users can generate new Neutrinos by sending Waves to the smart contract at a fixed current market price provided by a network of oracles.

https://beta.neutrino.at/neutrino/usd-n

Users can also stake Neutrinos and generate passive income in that stable coin.

Depending on what asset is used as a price peg, there are many possibilities of new Neutrino-based synthetic assets, such as gold neutrinos, stock market indexes or crypto portfolio indices.

All those synthetics can be easily traded on decentralised exchanges like Wave flow dapp, centralised exchanges like Tidex or on hybrid exchanges like Waves.exchange.

The world has changed and become more connected. At the moment, DeFi is more than just applications within one blockchain, Waves, Waves Enterprise, Bitcoin or Ethereum. To reach mass adoption fast, we should collaborate with different groups of developers and ecosystems: cooperation over competition is the new motto. To be really useful, DeFi applications should be built on new kind of decentralised protocols: interchain protocols within hybrid-complex trustless environments. The team behind Neutrino is ready to work hard in 2020 to make that a reality.

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A community of passionate blockchain developers & enthusiats across Africa building on Waves blockchain

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