In the wake of the COVID-19 pandemic, regulators, financial institutions, and customers found themselves steering through unknown waters. From maintaining cash flows and liquidity to re-adjusting operations, banks were compelled to put up with strict containment measures to weather the crisis. Lockdowns and social distancing limited customers from physically visiting banking halls. Banking services that are not accessible online, including instant bank drafts, unlimited cash withdrawals, safe deposit boxes, and notary services, were adversely affected.
Nevertheless, the global financial industry remained resilient, and more people became interested in participating in financial markets, like stocks and crypto, to protect their financial assets. These market forces made the decentralized finance (DeFi) space take off to new and exciting levels. Unfortunately, despite the enthusiasm, DeFi developers and users discovered a myriad of problems that inhibited the full potential of the space – scalability, security, and governance.
DeFiChain, a blockchain project optimized for the DeFi space, was born as a practical solution to the above problems. This article profoundly delves into DeFiChain, how it works, who created it, the DeFiChain coin, and some significant developments in the DeFiChain ecosystem.
What is DeFiChain?
Bitcoin is the pioneer of all blockchains and was designed to be a purely peer-to-peer (P2P) form of electronic cash. It is supported by a decentralized network of computers and is intended to facilitate fast and transparent financial services.
According to Electric Capital’s 2021 developer report, Bitcoin has roughly 700 monthly active developers, while Ethereum boasts over 4,000. This is primarily because Bitcoin was designed as a payment processor while Ethereum was built to facilitate dApp creation. But recent data shows that Bitcoin Layer 2 scaling solutions, like Lightning and DeFiChain, are accelerating the creation of dApps on the Bitcoin network.
DeFiChain is a blockchain platform designed to exploit the full potential of DeFi in the Bitcoin ecosystem. It is built on the Bitcoin network to draw on the security and immutability of Bitcoin. It aims to bring the entire DeFi capacities to the Bitcoin ecosystem.
DeFiChain was launched towards the end of 2019 to provide financial services that financial institutions offer, such as lending, borrowing, investing, custody, and asset transfers. However, DeFiChain differs greatly from commercial banks because it's a decentralized banking platform. Its decentralized nature implies it's resistant to government monitoring and censorship, and anyone can access it from any part of the globe.
The platform guarantees fast, transparent, and decentralized financial services. It's built on the Bitcoin blockchain as a software fork using Merkle roots. DeFiChain activities are non-Turing complete, making them fast and cost-effective, with low smart contract risks. The DeFiChain developers position the project as an innovative blockchain that will solve the scalability, security, and governance problems plaguing DeFi 1.0 projects. These are the major benefits of DeFiChain:
Development of various financial activities and vehicles for the crypto economy.
High transaction throughput.
A safer DeFi network anchored to the Bitcoin blockchain.
Rapid development of DeFi applications.
Nominal risks associated with smart contracts.
Reliable off-chain and on-chain governance.
How Does DeFiChain Work?
Bitcoin and Ethereum are the two major blockchains in the crypto space, both of which have stirred the growth of DeFi. But these chains have their drawbacks, which hinder the full potential of DeFi. For example, though Bitcoin has a time-proven security reputation, it only facilitates simple financial transactions. On the other hand, while Ethereum supports the creation of dApps to conduct complex transactions, it's faced with scalability and gas fees problems.
This is where DeFiChain comes in – it's designed to solve issues like scalability, security, and governance. It achieves this by creating a network for DeFi applications on top of the Bitcoin blockchain, leveraging a hybrid consensus mechanism of PoS and PoW, and embracing a governance model. Let's closely examine how DeFiChain works to solve the above issues.
How DeFiChain Tackles the Scalability Problem
In decentralized blockchains with no central governing body, individual computers spread across the world (nodes) are responsible for establishing network consensus. For example, Bitcoin reaches consensus by prioritizing the first node that solves a cryptographic puzzle, Proof-of-Work (PoW) mining. The node takes the lead in safeguarding the security of the network. However, it's nearly impossible for one node to take the lead for consecutive turns.
PoW mining offers a high-security decentralized system at the expense of transaction speeds. Bitcoin requires an average of 10 minutes to confirm 2700 transactions. Ethereum boasts a block time of 13 seconds. Both transaction speeds are deemed slow, especially in settling online payments.
DeFiChain leverages a Proof-of-Stake (PoS) consensus mechanism, where the network selects a random network validator for a specified block time to establish the following network state. The PoS mechanism is more energy-efficient than PoW and can be scaled to reach the required network bandwidth. To become a network leader or masternode, nodes must deposit a minimum of 20,000 DFI tokens into the DeFiChain treasury system.
How DeFiChain Tackles DeFi Security Issue
Since the introduction of DeFi, most developers have been using Ethereum to build decentralized applications (dApps), making it the most expansive DeFi blockchain. But most of the biggest DeFi hacks, such as Ronin, Wormhole, Nomad Bridge, Beanstalk, Harmony Bridge, and more, targeted Ethereum dApps by exploiting smart contract bugs.
DeFiChain solves this security problem using a non-Turing complete language to program smart contracts. However, DeFiChain is not the first blockchain to use this programming language: Ziliqa has already implemented it. So what differentiates DeFiChain's security approach from Ziliqa's? Well, DeFiChain's next level of security originates from the Bitcoin network itself. Since its inception more than ten years ago, Bitcoin has never experienced any security breach.
DeFiChain takes cryptographic snapshots of its most current state and saves them on the Bitcoin network – much like backing up your computer data on the cloud. This process is referred to as anchoring. Thus, DeFiChain is anchored to the Bitcoin blockchain for security purposes. Stakers publish DeFiChain block hashes occasionally to the Bitcoin network, allowing public audit and block anchoring. This way, the DeFiChain blocks are fully secured and immutable and can be verified against the most recent records anchored to Bitcoin.
DeFiChain adds another security layer via the robustness of the PoW mechanism. While DeFiChain uses a PoS mechanism, it also applies Bitcoin's PoW to label blocks with immutable hashtags. It leverages the PoS mechanism to choose block leaders and attain a consensus.
How DeFiChain Tackles the Governance Issue
Most crypto users often overlook governance when discussing DeFi problems. Nonetheless, the DeFiChain founders believe that for a blockchain project to remain true to its vision and continue solving user needs, it should be community-driven. MakerDAO is one of the most successful governance projects in the crypto space. However, most crypto projects, including Bitcoin and Ethereum, are rigid in their security and community participation to the point that upgrades made to their core network features can potentially make them split – undergo a hard fork.
For instance, in July 2016, Ethereum hard-forked into two networks: Ethereum (ETH) and Ethereum Classic (ETC), following the DAO hack dilemma. ETH developers decided to act contrary to what Ethereum originally stood for – upholding decentralization and independence from external politics. The developers who maintained their stance were forced to split and create ETC.
Being aware of such dilemmas, DeFiChain polished its governance system by letting its community members (DFI token holders) participate in making DeFi Improvement Proposals (DFIPs). You must hold a minimum of 500 DFI tokens to be allowed to submit a proposal. Besides, you must be a masternode (holding at least 20,000 DFI tokens) to vote on DFIPs. Every masternode has a single vote, and voting happens on Github – an open protocol for programming data. Through this governance model, the team believes DeFiChain will likely grow in line with the best interests of its community.
Who Created DeFiChain?
DeFiChain was conceived through the friendship of two individuals: U-Zyn (an earlier Bitcoin user and exchange co-founder) and Julian Hosp (a healthcare specialist and successive businessperson). When Julian and U-Zyn first met in 2016 for coffee, they clicked well, particularly regarding their deep interest in blockchain technology. Though they rarely communicated throughout 2017, they reunited in 2018 and co-founded DeFiChain in 2019. Julian is currently the DeFiChain CEO, while U-Zyn is the chief technology officer (CTO).
The DeFiChain Coin: DFI
DFI token is the native currency of the DeFiChain ecosystem, fueling all its activities. Currently, DFI has a circulating supply of almost 600 million and a maximum supply of 1.2 billion. It also has a TVL of over $600 million. Here is a list of markets to trade DFI, including Kucoin, Bittrex, and Huobi Global.
DFI token’s utility spans from fee payment for network transactions and smart contracts to governance voting:
Fee payment for DEX transactions
Fee payments for asset transfers
Collateral for borrowing assets on DeFiChain
Voting on governance proposals
DeFiChain didn't carry out public sale, initial coin offering (ICO), or initial exchange offering (IEO). Out of the maximum cap of DFI coins, 49% were issued at genesis, and 49% of the circulating supply was allocated to the DeFiChain Foundation. To ensure token decentralization, the Foundation is prohibited from holding more than 49% of the circulating supply. The rest were allocated to qualified investors and external partners to fund developments.
DeFiChain Key Features
DeFiChain has eight key features that make up its ecosystem:
Decentralized token wrapping
Decentralized oracle pricing
Transferable debts and receivables
Decentralized non-collateralized debt
This tool allows individual users and groups to borrow and lend assets without intermediaries. According to the Amberdata report, the Total Value Locked (TVL) in DeFi protocols rose from $601 million at the beginning of 2020 to $239 billion by March 2022. Most of these protocols run on the Ethereum blockchain, meaning they cover just 15% of the crypto market based on market cap. DeFiChain addresses the whole crypto market, starting with Bitcoin and stretching to other ecosystems through token wrapping and polling.
DeFiChain's decentralized loans are fully collateralized, and due to the volatile nature of crypto, users are required to over-collateralize their positions. This allows them to borrow funds based on the amount of crypto they hold. Besides, they can sort out their immediate financial needs without necessarily selling their cryptocurrency holdings.
Decentralized Token Wrapping
One of the major problems plaguing DeFi is the inability to work with various digital currencies directly, on-chain. Though on-chain transactions are performed using the DFI token, DeFiChain can use BTC, ETH, and other cryptocurrencies through token wrapping. Wrapping enables a token to be used on another chain, increasing its utility.
Most wrapping methods involve using a custodian to manage the locked assets. These centralized methods are prone to counterparty risks and censorship. DeFiChain offers a decentralized wrapping method that allows asset owners to remain in control of the locked assets by interacting with a protocol. While doing so, it rewards users who wrap tokens on the network to encourage DeFi growth.
DeFiChain's decentralized token wrapping feature is essential in enabling users to hold any crypto and explore more investment opportunities. For instance, if you own some BTC, you can lend someone ETH by wrapping your coins. Still, if you want to hedge against the coin you hold, you can use the wrapping feature to spend your holdings and receive options in other assets, like stablecoins.
Watch this video guide to learn about wrapped tokens.
Decentralized Pricing Oracles
DeFiChain has inbuilt pricing oracles that gather data from other blockchains and traditional systems. Oracles are essential tools for blockchains to gather precise data from other networks and even from non-crypto databases. DeFiChain’s inbuilt oracle feature uses smart contracts to establish the number of participants, consensus proportion, and the factors for incentivizing participants.
Decentralized Exchanges (DEXs)
DeFiChain's DEX feature facilitates crypto atomic swaps in a peer-to-peer (P2P) manner. The functionality matches users who want to trade directly without the need to buy and sell assets via an exchange. This minimizes the risks of using exchanges and ensures users retain the custodianship of their assets.
Besides, it eliminates the custodianship risk from the exchange itself since the system is a P2P based on the fair market price of an asset. Though there are several DEXs in the market, the DeFiChain solution is unique as it integrates atomic swap functionalities with DEXs.
Transferable Debts and Receivables
In centralized finance (CeFi), the debts and account receivables are only managed by banking institutions. The opaque nature of these transferable debts was a contributing factor to the severe contraction of liquidity in the 2008 financial crisis. DeFiChain brings transparency to the exchange of transferable debts and loans based on receivables and other financial products. This is quite beneficial, especially for small and medium enterprises (SMEs).
For instance, Josiah's PCB manufacturing company supplies printed circuit boards (PCBs) to a big computer assembling plant, but the plant pays for the products on an invoice basis after 60 days. Meanwhile, Josiah pays for raw materials, and sorts out salaries and other monthly expenses. Though the assembling plant pays the invoice, it's not in time for Josiah to sort out his expenses.
Without DeFi, Josiah must visit a bank and agree to the available interest rates to secure a short-term loan. With the DeFiChain transferable feature, Josiah can borrow from a global pool of lenders based on the receivables. Since the lenders can see the risk worthiness of the computer company, Josiah can probably receive a higher amount and better lending rates than the one offered by the bank. DeFiChain has the functionality for companies to build smart contracts, facilitating transparent investments in transferable debts and receivables.
Decentralized Non-Collateralized Debt
In the future, DeFiChain will offer non-collateralized loans using the creditworthiness of its users. Through various types of provable credentials and records of a user's borrowing and repayment history, the platform will create a functional non-collateralized debt system.
Most identifier projects built today consider anonymous and pseudonymous reputation-reporting models centred on users' decentralized identifiers (DID) and the verifiable credentials (VC) provided by financial regulators. The ideal reputation-centred and risk assessment models need to be developed. Although this requires time, it's conceivable that type of model could complement or even replace the current credit rating scores.
Asset tokenization is the representation of physical assets, like real estate or a piece of artwork, in blockchain tokens. It has great potential and is one of the most exciting investment areas for cryptocurrency holders. Although there are several asset tokenization platforms in the crypto space, most have abandoned their original vision of being purely tokenization platforms and sort service diversification.
Even those still on track, including Tokeny and Tokenize-IT, heavily rely on manual and centralized processes to operate. General-purpose blockchains with Turing-complete commands like Tezos create complex smart contracts.
DeFiChain offers functionality specifically meant for asset tokenization. You can use it to seamlessly tokenize real-world assets, such as real estate, company equity, artwork, bonds, debt, jewellery, etc. The functionality will be fully decentralized, legal, and authorized by several jurisdictions, meaning users will easily trust them.
The current DeFi space is highly populated with general-purpose networks, mainly offering Turing-complete language for programming smart contracts. These chains require a lot of coding to create dApps, which may increase the chances of smart contract bugs. DeFiChain uses non-Turing complete command sets to minimize the attack layer. It's anchored to the time-proven Bitcoin blockchain to maximize the best features of PoW alongside its PoS mechanism. Furthermore, a report by Arcane Research shows that Bitcoin developers have been quietly developing more dApps.
Features that form primary requirements, like multisig, are demanding to execute or lacking on general-purpose networks. Besides, applying Turing-complete command sets necessitates developers to use complex programs when creating apps. For instance, to build a P2P lending platform on the MakerDAO, a developer needs almost 2,000 lines of code. Even a single bug in one line can cause severe consequences to the app. Operating such databases implies a high probability of errors and a more extensive attack layer for even simple applications.
Read this article to learn more about Bitcoin's DeFi and protocols building on its ecosystem!
Josiah is a tech evangelist passionate about helping the world understand Blockchain, Crypto, NFT, DeFi, Tokenization, Fintech, and Web3 concepts. His hobbies are listening to music and playing football. Follow the author on Twitter @TechWriting001