Adoption of financially inclusive DeFi
by Kurt Nielsen PhD, President of Partisia Blockchain
Financial inclusion is at the heart of the original narrative that formed the beginning of blockchain and later decentralised finance (DeFi).
While the global financial crisis in and around 2008 sparked a wave of innovation on how to improve traditional finance, the broader adoption of DeFi–outside of the blockchain ecosystem–is very limited even after 15 years. Why is that and was the narrative about a future where the financial systems would be resilient to “single point of failures” wrong?
I believe the answer is “no” and that the obvious “single point of failures” around crypto exchanges is a major failure and a clear deviation from the DeFi narrative.
We need to get back on track with more innovations true to the principles of DeFi and mature these solutions in collaboration with traditional finance. In doing so it is important to work with financial regulators to safeguard the protection of vulnerable people through principles which ensure financial inclusion in a safer way – as opposed to rules aimed at protection through financial exclusion.
Partisia has been part of the DeFi revolution before the concept was created. In parallel to the introduction of Bitcoin, the Partisia team worked on a different type of decentralised cryptography that was also designed to remove intermediates, which manage confidential information, such as sealed bids in financial markets.
The initial work by Partisia was likely the world’s first decentralised exchange with sealed bidding which went into commercial use in 2008.
With the Partisia Blockchain’s founding in 2020, the work continues down this path of innovations and addresses weaknesses in both traditional finance and DeFi. Together with TeraBlock, a well-established cross-chain interoperability protocol and a DeFi infrastructure-as-a-Service provider, we are about to bring a newly developed execution platform for DeFi to real-life use.
This aims to address several recognized weaknesses with one of the most popular DeFi solutions – automated market makers (AMM). The Partisia Blockchain is designed for scalability, interoperability and privacy, and the framework uses all these basic properties to improve AMMs. What opportunities each of these present?
Scalability and interoperability
The core innovation behind AMMs is to conduct trading without direct interaction and matching of buyers or sellers of crypto assets. This significantly reduces the complexity of the market solution. Since an AMM solution is a set of smart contracts, the security model is also significantly improved as a genuinely decentralised trading platform.
Ethereum has been the most used blockchain platform for AMM solutions. And token bridges – as well as second layer blockchains – have broadened the uptake to other blockchain networks.
Recent developments take this development one step further and run AMMs across independent blockchain platforms, i.e. cross-chain DeFi.
This poses a set of new obstacles, such as the challenge of representing states (data and tokens) across independent blockchain platforms or shards. We’ve been forced to solve this problem as scalability comes through independent shards (like a real scalable database), which is like running a cross-chain AMM.
The solution is a mechanism guaranteeing fixed prices across completely independent liquidity pools living on independent blockchains or shards. This model has been developed with support from the Centre for Blockchain and Electronic Markets and published here.
With this innovation both unlimited scalable and interoperable use of AMMs without compromising the basic DeFi properties are ensured, which contrasts with the existing “all or nothing” execution, as well as the sequential “one user at a time” use of the current best practice.
Privacy and front-running
Another challenge and obstacle for a broad uptake of AMM solutions within and beyond the blockchain ecosystem is front-running. On Ethereum and similar blockchain platforms, the AMM transactions are transparent to all, but added to the blockchain consensus model by one or more actors, such as “mempool operators” or “block producers”. The problem is that these actors can delay and place their own AMM valuable transaction, i.e. front-running.
Front-running is a critical problem which needs to be solved for the sake of the users, but also a problem that is critical for the DeFi narrative as a “single point of trust” failure. Fortunately, the advanced encrypted computation that is built-in to Partisia Blockchain provides a decentralised solution pointing back to the original Partisia work and the first commercial use of multiparty computation (MPC) for safeguarding sealed bids.
The straightforward and concrete solution is an encrypted computation keeping the actual transactions (swaps) secret until it is fully executed. Hereby, the arbitrage opportunity from frontrunning is effectively addressed.
Regulation and traditional finance
For DeFi service providers aiming at broadening the uptake of DeFi solutions outside of the blockchain ecosystem and in direct competition with traditional financial solutions, regulatory requirements will be instrumental. While financial fraud regulations, such as KYC and AML, are obvious, addressing front-running may soon become equally important.
Also, scalability and interoperability are crucial for existing financial institutions to adopt and invest in DeFi like AMM. If the technology cannot supply a model for unlimited scalability like cloud computing and reduce interdependencies, it is hard to drive adoption of DeFi – an adoption of financial inclusion that the world deserves.
Kurt Neilsen holds a PhD in Economics and is an experienced entrepreneur and business developer who turned advanced cryptography solutions into innovative high-tech businesses for over 15 years.
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