In our current age, centralized financial institutions control our money, and power is centralized in the hands of those who control it. Users are cut off from the decision making and watch on as their purchasing power continues to decrease.
Introducing decentralized finance (aka DeFi). DeFi is the new era of finance that puts that power back in the hands of the users. In this deep dive, we will be looking at DeFiChain.
Overview
Problem
Today, almost all financial services are run by banks. Investors who wish to grow their wealth typically look for centralized banks and engage in their financial services (timed deposits, dividend-making instruments, stocks, ETFs etc.) However, many underlying issues exist:
High transaction costs due to regulatory requirements and control by large institutions. Services that require a broker are even more expensive, as agents and other types of middlemen are involved.
Slow transaction times, particularly for cross-border transactions. Moving from one institution to another can take hours within a country, and days between countries.
Lack of transparency and unfair advantage to large players. Financial instruments are complex and most people do not have access to such information. Lack of transparency is also one of the reason that caused the 2008 Financial Crisis, leaving smaller investors and users at a disadvantage compared to institutional investors.
Inaccessibility and/or higher cost to lower income people. In many places, financial services are not widely available. According to the World Bank's latest report nearly 1.7 billion people are unbanked globally.
Fintech has been attempting to address these problems without much success. Their services are built on top of a system that fundamentally requires the overhead of agents to provide trust. If anything, the problem with lack of transparency is not being addressed as it is still going through the same major TradFi institutions.
Solution
DeFiChain is a decentralized blockchain platform that aims to specifically offer decentralized financial applications, such as borrowing, lending, investing, saving, basically anything a commercial bank can do.
The difference between DeFiChain and a normal bank is that the former is decentralized, meaning no single authority or entity can control the network.
DeFiChain is intentionally non-Turing-Complete (read here to find out more about Turing-completeness). This means it only supports functions needed for Decentralized Finance, resulting in a blockchain that provides higher throughput and better functionality specifically for dApps related to finance.
Why non-Turing Complete?
Lower potential for coding errors, which plagued Ethereum smart contracts ($600M Ronin Hack)
In the area of finance, it is appropriate to restrict the capabilities of the language in favour of a more secure system with greatly reduced attack vectors
Here are some examples of what DeFiChain offers:
Decentralized lending
Decentralized wrapping of tokens
Decentralized Pricing oracles
Decentralized exchanges
Transferable debts and receivables
Decentralized Non-collateralized debt
Asset tokenization
Distribution of Dividends
In order to ensure its immutability and security, DeFiChain anchors itself to the Bitcoin blockchain. Every few minutes, DeFiChain saves its most recent Merkle tree to the Bitcoin blockchain. With this, the most recent chain is always fully secure and immutable, and can be checked against the most recent record anchored to Bitcoin.
Additionally, DeFiChain keeps its own consensus mechanism (Proof of Stake) and function set, allowing for all those characteristics that Bitcoin does not inherently have. This is achieved by DeFiChain being a dedicated non-Turing-complete blockchain designed specifically for DeFi.
Why Bitcoin over other Turing-complete chains?
Security
Scalability
Ethereum, along with other Turing-complete chains, makes the code extremely complicated and vulnerable to exploits and hacks.
According to DEFIYIELD’s Rekt Database, DeFi scams, exploits and hacks are reported to be about $5 billion in total, where Ethereum contributes to about 30%. ($40 billion is Terra/LUNA’s bank run that happened from May 8th 2022)
On 29th March 2022, DeFi saw its biggest hack to date, where $615.5m was stolen from Ronin, a blockchain project linked to the popular online game Axie Infinity.
The second problem, scalability, stays mostly within Ethereum. Ethereum’s network usage is already close to maximum capacity. It simply does not seem feasible to use the network for all of the decentralized finance applications. In an interview, Vitalik Buterin acknowledged that they never designed Ethereum’s scalability (though Ethereum Improvement Proposals are now constantly being implemented - Ethereum)
Tokenomics ($DFI)
DFI is the native token of the DeFiChain blockchain and was first listed on LaToken in May 2020.
DFI is capped at 1.2 billion coins, and is divisible up to 8 decimal places. Fees from transactions are burned automatically. According to DeFiScan, 308M DFI has been burnt so far.
The number of address holding DFI has been steadily increasing as well, reaching a total of 78,063 addresses overall as of 24th July 2022.
DFI is used for fee payment for all transactions and smart contracts on DeFiChain and governance/voting on improvement proposals. DFI is also used for the creation of new tokens on DeFiChain (DCT), where users can create new tokens for a fee of 100 DFI.
Masternodes
DeFi is a Proof of Stake blockchain. One requires 20,000 DFI to own a masternode, and nodes are entitled to:
Periodic staking rewards
Submission of votes to key decisions that govern DeFiChain in the governance system.
Submission of votes on how the DFI community budget is being allocated and distributed.
Technicals
State Commitments
DeFiChain periodically anchors its block to the Bitcoin blockchain via Merkle root. This method of state commitment is analogous to layer 2 protocols (L2s) on Ethereum, where transactions are processed off-chain and bundled with a merkle root to prove the inclusion of a transaction.
While DeFiChain inherits its security from Bitcoin, L2s inherit security from Ethereum.
Programming Language
DeFiChain scripting language is called Recipe, a non-Turing complete language which has opcode support for DeFi instruction sets.
Ethereum was created as a general-purpose blockchain, with solidity being a Turing complete language. This enables applications other than defi protocols to build on it.
Founders
DeFiChain was founded by Dr. Julian Hosp and U-Zyn Chua.
Dr. Julian Hosp
Julian Hosp is the CEO and Co-Founder of CakeDefi, a DeFiChain partner that offers DeFi services and enables users to earn cash flow from their crypto assets. Some remember Julian Hosp for his controversial past with the now defunct TenX, read here as Julian attempts to debunk some of these misconceptions.
U-Zyn Chua
U-Zyn Chua is the CTO and Co-Founder of CakeDefi, and also the Chief Engineer for Zynesis, where he served as a blockchain consultant to the Singapore Government.
Initial Token Distribution
DeFiChain did not conduct any sales or ICOs. Of the roughly 1.2 billion $DFI coins, 49% will be issued to the DeFiChain Foundation at the start. The rest will be issued to Masternode holders over time. Of the 49% initially issued $DFI coins, 49% will be kept by the DeFiChain Foundation. The rest may be distributed to accredited investors, large funds and institutions, collectively known as external partners, to fund the initial development of DeFiChain.
Governance
As with all decentralized protocols, DeFiChain’s governance system allows for community stakeholders to vote for DeFiChain Improvement Proposals (DFIPs). Masternodes are allowed to vote (meaning you need 20,000DFI to vote), and 10 DFI is needed to submit a Community proposal.
The DeFiChain Foundation, the team behind the protocol, is responsible for the issuance of tokens and is governed by an independent board. This board will be governed by the DeFi masternodes voting on its members and also by giving directives on key decisions.
The DeFiChain Foundation awards tokens to users and groups to speed up adoption (see the section on initial token distribution). The Foundation is tasked with boosting the ecosystem, bringing in ecosystem partners, directing the development of the tools for ecosystem partners, and other activities to increase the number of ecosystem partners.
The community development fund, initiated by the DeFiChain Foundation, will allow the community members to determine the use of these funds for development, marketing, or research that forwards the DeFi community.
Sounds centralized?
When I first saw this, my initial thoughts were “Sounds very centralized to me…” Especially when the Chairman of DeFiChain Foundation is none other than the Founder, Julian Hosp himself.
However, on 16th June 2021, to further DeFiChain’s agenda to establish on-chain governance and decentralization, DFIP #7 stated that DeFiChain Foundation should no longer play the custodian of such coins and should therefore be destroyed.
273.7 million DFI, which were previously held in the Foundation Wallet, have been burned following the results of the voting proposal. The burned amount will be redistributed into circulation via block rewards over time.
Recent Developments
On 23rd July 2022, DeFiChain is officially listed on crypto exchange Huobi, a significant achievement since their last listing on Kucoin that happened during Jan 2021.
During 2021, DeFiChain had the highest development activity among all the major DeFi projects. These developments include:
Listing on Kucoin & Messari
Approving multiple DeFiChain Improvement Protocols (DFIPs)
Adding multiple pool-pairs to Liquidity Mining
Launching decentralized loans, atomic swaps, new Emission rate
100% carbon neutral blockchain
Launching new dTokens
De-registration of DeFiChain Foundation
Check out the details here.
CakeDefi, an ecosystem partner company in Singapore, launches CakeDefi Ventures with $100M in capital. CDV will focus its investments across Web3, metaverse, NFTs, gaming, esports and fintech. By the end of 2022, the company plans to increase customer pay-outs by 74% or more, which equals to around $400 million.
Roadmap
According to DefiChain’s official website and Messari, DeFiChain is on track on whatever developments they have set out to achieve.
The next big roadmap milestone would be implementing EVM support on DeFiChain.
Personal Thoughts and Conclusion
In the spirit of transparency, I am personally invested in DeFiChain because I see the problems it is trying to solve and how much potential it could bring in the future. I am particularly bought over by the fact that DeFiChain is deliberately made non-Turing complete, in order to specifically target the decentralized finance sector, and also ensuring security and immutability by periodically anchoring to Bitcoin’s blockchain.
Definitely, there are numerous competitors out there that offer a more robust consensus mechanism and function set. Fantom, AAVE and MakerDAO are the more serious contenders. Competition within the space will definitely grow in the future, and new projects will be launched, but not all will survive.
However, I am confident that DeFiChain will continue to take up market share and grow at a steady pace if they continue to keep up with their development and accomplish their roadmap objectives.
I am excited to see how DeFiChain’s services will not only benefit users in first-world countries (CakeDefi), but also transform developing countries by offering these financial services which are unfamiliar privileges to most.
Resources
Messari - https://messari.io/asset/defichain/profile/roadmap
Road Map - https://defichain.com/
White Paper - https://defichain.com/white-paper/
Blog - https://blog.defichain.com/
CakeDefi - https://cakedefi.com/
Analytics - https://www.defichain-analytics.com/