The Dawn of Decentralized Finance: An Introduction
By Mels Dees

Aug 25, 2020

Part 1 in a series dedicated to the DeFi boom & Dusk Network’s role in its future

Decentralized Finance, or DeFi for short, has become a hot topic of discussion inside the blockchain & conventional finance industries. Spurred by high profile (crypto) success stories in decentralized lending, the industry has begun to spotlight the massive potential of decentralized finance and blockchain technology, resulting in the kind of industry-wide attention that acts as a catalyst for accelerated advancement of the concept. But what is DeFi?

In essence, DeFi aims to improve financial services and sectors as they exist today through revolution instead of evolution, crafting a fresh approach to the status quo processes that have become bloated over the course of decades of incremental change. Certain procedures, intermediaries, fees, and accessibility limitations are (or can be made) redundant with today’s technology. DeFi is the idea that more efficient and effective systems can be put into place.

Centralized Finance empowers a select few with control within a system or service you use. Banks, for example, are custodians of your money and assets. This means they can seize, freeze, or block the transaction of said assets at their discretion. The bank functions as a platform (a Financial Market Infrastructure or FMI) for your account and its related services. Decentralized Finance is positioned to hand authority back to the users by removing the power of said intermediaries. To do this, a decentralized infrastructure is necessary.

Blockchain: the DeFi engine

This decentralized FMI takes the form of a base layer protocol. In other words, a blockchain. This blockchain serves as the infrastructure on which to build services and functions through smart contracts. Smart contracts can be seen as your new intermediaries: immune to human error, faster than conventional asset management, free of unnecessary fees, and able to utilize optimized algorithms to the benefit of the user. These DeFi smart contracts need a dFMI in a similar way to how mobile games need an app store to exist on, or how applications need an Operating System. Without these platforms, there would be no scaling, no replicability, no standardization, and no functionality.

Unfortunately, innovation often carries the burden of growing pains and the budding DeFi industry is no different. Ethereum, the number one DeFi platform, has seen activity on its blockchain explode with the rise of DeFi, but its low throughput has caused transaction fees to skyrocket and transactions to see substantial hold ups. This combination of cost and delay is prohibitive for mainstream DeFi usage. These issues are unlikely to change due to the growing popularity of DeFi coupled with the visibility of Ethereum as a blockchain institution. Attempts are being made to improve the infrastructure by moving solutions off-chain but this often causes security issues and further reliance on intermediaries. Other proposed changes include transitioning the Ethereum network to a different consensus algorithm to speed up transactions.

The proliferation of these issues with Ethereum is holding DeFi growth and adoption back, which means there is a healthy market for DeFi competitors to capitalize on the burgeoning market with solutions of their own.

Dusk Network: the DeFi Market Infrastructure

The success of DeFi will hinge on the ability of competitors to come out with a viable and superior alternative that eases, or altogether solves, these growing pains. However, product alone does not guarantee a DeFi success story. For that, traction and usage is key.

Revolutionary technology
From its inception, Dusk Network’s technical specifications were built as a foundation for decentralization: designed as a privacy blockchain for financial applications while working towards being the DeFi infrastructure of the future. On a technical level, Dusk exceeds in the domains vital to facilitating DeFi, including:

- Privacy
In the present-day decentralised blockchain landscape, there are either smart contract platforms, or privacy blockchains. Before Dusk Network, the two were competing alternatives. With Dusk Network, the benefits of privacy are brought to the realm of smart contracts for the very first time. Privacy is key when it comes to finances, whether centralized or decentralized. If you stop to think about it, talking about decentralised financial applications on a public blockchain without privacy effectively means that (your) personal financial information is accessible by anyone with an internet connection. With the popularity of DeFi growing, the need for a decentralised privacy-preserving blockchain infrastructure will become more widely understood.

- Instant settlement finality
Dusk Network’s consensus mechanism (SBA) is permission-less and preserves finality guarantees.
This means that there are no block confirmation times for Dusk Network, as the transaction is final as soon as its block is added to the chain. Also, the chain is un-forkable. This brings a level of certainty that is important for all DeFi applications but vital when regulated assets are traded. It’s easy to see that without this ‘instant settlement finality’ a lot of uncertainty would enter the system. At how many block confirmations do we deem a transaction irreversible? How does the legal reality deal with blockchain forks? What happens if a transaction is reverted, after it’s been confirmed? And who had the rights to dividends at that time?

Infrastructure for collaboration

Revolutionary technology is only one side of the equation. At the same time, great headway needs to be made in signing on and integrating a wide variety of partners onto the Dusk Network platform. Partnerships such as these put the ‘use’ in ‘use-case’ and act as both proof of Dusk Network’s potential applications as well as evidence of its legitimacy in the industry.

We’re proud of what we’ve achieved so far and excited about what’s yet to come in regards to the Dusk Network infrastructure. Current examples of real-world applications and business angles on our market infrastructure include: the digitization of shares of thousands of SMEs in the broader Benelux region, paving the way for enterprises to benefit from automation and accessibility to new infra; the issuance of the zero-knowledge utility token ‘TWO’, issued amongst institutions to take blockchain education in the Netherlands to the next level; Central Bank Digital Currency (CBDC); and, the appearance of Security Token Exchanges, to simplify the complexities of custody, clearing, and trading of securities.

The Dusk Network team understands the opportunity in front of them and is working tirelessly to make Dusk the DeFi market infrastructure of the future. We hope you will join us in our mission and stay tuned for new developments as we shape a better future together!

About Dusk Network
Dusk Network is the privacy blockchain for financial applications. A new standard for compliance, control and collaboration. Its mission is to enable any size enterprise to collaborate at scale, meet compliance requirements and ensure that personal and transaction data remains confidential. Companies use the Dusk Network blockchain to issue tokens, trade and collaborate via smart contracts.

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