How Blockchain is Contributing to a Decentralized Finance Revolution
Blockchains show great promise in society for transforming the current 50 year plus centralized inflationary fiat-based economy into a more secure and efficient DeFi digital economy with the added benefit of distributing more wealth worldwide.
As the name suggests, a blockchain is made up of a series of “blocks.” The blockchain protocol records each transaction in a block without the aid of a third party like a bank, allowing for more efficient and less expensive transactions. The blockchain algorithm automatically encrypts and authenticates the transaction and is immediately distributed to all validators in the network, minimizing the possibility of fraud and hacking, and enabling a more secure network. The terms of the transaction do not include any personal or identifying information, but since they are public, they are transparent, permanent, and traceable. So, you might say cryptocurrency transactions produced by a blockchain are pseudonymous.
Blockchain updates with security patches, and other changes in the code requiring a hard fork may lead one to question the stability and efficiency of the protocol. Hard forks can leave those in defiance an obsolete less valuable outdated forked blockchain network. As blockchain technology advances, there will always be a need to make on-chain updates automatically, giving an edge over other blockchains requiring slow inefficient off-chain changes associated with hard forks. Ultimately, a fork-less solution gives more control to the members of its community without making undesirable compromises.
Web 3.0 and Decentralized Finance (DeFi)
Some history of the Internet and how it has evolved will be beneficial to understand how it will interact and support cryptocurrency and Defi in the future. The original Internet began about four decades ago with the development of Transfer Control Protocol (TCP) and International Protocol (IP) allowing a way for computers to communicate with one another. Later in the 1980s, the World Wide Web was developed, enabling website browsers, and ushered in what we refer to as Web1. Due to a series of technological improvements, Web1 progressed to Web2 in the early 2000’s allowing for social media networking. However, Web2 hasn't been without its problems with Big Tech companies like Facebook and Twitter monopolizing the industry creating a more centralized structure, and censoring some of its users.
The next phase of the Internet Web3 was coined in 2014 by Gavin Wood, founder of Polkadot and co-founder of Ethereum, referring to a decentralized online ecosystem based on blockchain. Web3 is gaining ground and becoming more popular currently and may indeed aid in distributing centralized power away from the Big Tech companies in the future. Web3 developers are promoting the security and privacy offered by blockchain technology as it appeals to internet users making their platforms more secure against potential attacks of their information from being deleted or compromised. In addition, Web3 and blockchain together will allow for enhanced cryptocurrency trading, protocols, and developing cryptocurrency projects.
Web3 is already supporting innovative ventures in cryptocurrency such as: Decentralized Autonomous Organizations (DAO’s), Non-Fungible Tokens (NFT’s), and the Metaverse. Also, gradual moves away from the current centralized economy infrastructure into burgeoning trustless blockchain Decentralized Finance (DeFi) is expected in the future.
DeFi users control their own data and identity and benefit from a more efficient and secure DeFi blockchain infrastructure. The chart below shows how DeFi has blossomed since the start of 2021 continuing into the current year.
This chart from Defi Llama shows the current Total Value Locked (TVL) USD in DeFi was around $20 billion at the start of 2021, and about one year later a 10x increase to $212 billion
Blockchain Structure and Security
Blockchain is based on principles of cryptography, decentralization, and consensus utilizing smart contracts with trustless transactions. In most blockchains or distributed ledger technology (DLT), the data is structured into blocks with each block containing a transaction or bundle of transactions.
The structure of blockchain leads to inherent security properties. Each new block connects to all the blocks in a chain in such a way that it’s nearly impossible to corrupt. All transactions within the blocks are validated and agreed upon by a consensus mechanism ensuring that each transaction is true and correct, and there exists only one single valid copy of that record shared by all the validator nodes. This assures there is no single or central point of failure thus allowing for an immutable record of transactions.
The SwapDEX Blockchain
The SwapDEX blockchain is maintained by a set of validators or node operators that are selected through the Nominated Proof of Stake (NPoS) consensus mechanism which is responsible for producing the blocks and determining finality. The Phragmén election process selects validators from the available pool based on nominations.
The protocol is built on a Substrate framework, Ethereum Virtual Machine (EVM) compliant, and has the added benefit of a Web3 canary test network blockchain, Kusari (KSI), adding additional flexibility, security, and innovation to the network.
Proof of stake does away with miners and replaces them with validators. Instead of investing in energy-intensive computer farms, you invest in the native coins of the system. Three hundred validators bond their native coin SwapDEX (SDX) in the active set to take turns in proposing, validating, and appending new blocks.
To become a validator and to win the block rewards, you lock up or bond your coins in a smart contract computer code that runs on the blockchain. Block rewards are reaped by validators who distribute portions of their rewards to their nominators.
Nominators are native SDX coin holders who contribute to the security of the blockchain network by economically backing or nominating up to 16 validators of their choice.
Currently SDX blocks are generated every 6 seconds with very fast transaction speeds of 1500 transactions per second (tps).
Validators and nominators (stakers) are rewarded if the validators behave correctly. The slashing mechanism is built into blockchain protocols to discourage any validator misbehavior. It was designed to encourage security, availability, and network participation. A future article will discuss this topic.
The SwapDEX Chain has a decentralized governance system that can change any design decision and parameter. No hard fork upgrade is required, and each new feature is implemented on chain seamlessly without the need for node validators to update their existing software. This will allow easy adaption to new changes and emerging technologies in the future.
The use of WebAssembly (Wasm) in the Substrate framework powering Polkadot, Kusama, and other chains, including our own SwapDEX and Kusari chains give the ability to upgrade runtime logic without hard forking. The hard fork method of upgrading a blockchain is slow, inefficient, and error prone due to offline blockchain coordination required to bundle many upgrades into one large-scale event.
By deploying Wasm on-chain and having nodes auto-enact the new logic at a certain block height, upgrades can be small, isolated, and very specific. These Fork-less upgrades allow for quick seamless updates and long-term sustainability of the network.
In public blockchains the role of people participating in the network includes developing the open-source code of the network; securing the network by validating transactions; maintaining protocol through the consensus mechanism in proof-of-stake; and governing the network by participating in community discussions, voicing proposals, and voting.
Therefore, it is imperative to develop blockchains with functional digital infrastructure with the utmost security, and transparent governance with a set of well-defined operational rules.
Blockchains show great promise in society for transforming the current 50 year plus centralized inflationary fiat-based economy into a more secure and efficient DeFi digital economy with the added benefit of distributing more wealth worldwide. Mainstream adoption of trustless public blockchains and smart contracts are in the early stages and have the potential to contribute as one of the main pillars in the fourth industrial revolution.