Research
December 4, 2019

Building The Future of Cross-Fi

Advantages of Decentralized Finance

State of DeFi & Current Primitives

Advantages of Decentralized Finance:

  • Permissionless: Anyone is able to access decentralized financial networks through an internet connection. No individual can be denied service based on who they are, where they were born, or how much money they have
  • Programmable: Developers can create and intertwine financial services at a very low cost. Plug and play architecture helps compound the power of these services
  • Transparent: Public blockchains are transparent and auditable. They retain best of both worlds: informationon financial exchanges are available while privacy can be preserved
  • Trustless: Users don’t have to trust a central party to ensure that transactions are valid
  • Censorship Resistant: No central party is able to reverse the order of transactions and deem a validated transaction invalid at some later point in time. Similarly, a central party can’t turn off the service and anyone with access can use the network

Popular DeFi use cases:

  • Lending - Borrowing/Lending on a public blockchain with much less friction vs. traditional platforms.
  • Derivatives/Assets - Synthetic assets which are derivatives of other assets allows exposure without having the actual asset.
  • Decentralized Exchanges - Traders can trade on platforms that do not hold their funds custody
  • Payment solutions - Traditionally centralized payment solutions can be decentralized to be as effective while staying censorship-free

Growth in DeFi sector can be measured by the amount of ETH locked into the ecosystem. The amount of ETH locked into the ecosystem has grown by over 3x from ~900k ETH to ~2.9m ETH (>$500M) in a year.The dominant sectors for DeFi apps are Lending and Derivatives

The DeFi Stack

Risk is not removed, but shifted from counterparties to smart contracts

Note: non-exhaustive list, Wave does not make any claims on counterparty or technical risk. Platforms have differing collateralization requirements

The DeFi Stack: Stablecoins

Stablecoin implementations:

  1. Traditional Collateral-backed
  2. Crypto Collateral-backed
  3. Hybrid / Algorithmic

Traditional Collateral stablecoins include Tether (88% of the total stablecoin market share) and USDC (4.4%)

MakerDAO’s Dai is the most prominent crypto collateralized stablecoin, with a market cap of ~$86M

The DeFi Stack: Lending Protocols

The DeFi Stack: Oracles

Oracles provide smart contracts with data from the outside world (i.e. the price of ETH to trigger a liquidation if collateralization drops below requirements)

Current approaches to ensure validity of oracles include:

  • Multiple data sources - Safer, but more expensive
  • Multiple oracles - Reduces probability of collusion
  • Financial incentives / penalties - Earn rewards for performing honest work, but penalize if they misbehave

There is no one-size-fits-all solution as dApps require different guarantees based on their specific use cases, with the trade-off being safety vs. cost.

The DeFi Stack: DEX

Decentralized exchanges operate without a central authority or middlemen, allowing users to transact peer-to-peer with little risk of censorship

While DEXs historically suffer from price discrepancies across exchanges, the increasing popularity of DEX aggregating tools has tightened the spread across these exchanges

  • Protocol for automated token swapping on Ethereum
  • ETH and ERC20 tokens are pooled in reserves, and the ratio of these assets determines the exchange rate
  • Decentralized ERC20 exchange with token for staking
  • Similar to centralized alternatives, but trades are settled on-chain
  • Protocol for peer-to-peer asset exchange on Ethereum
  • Native ZRX token used for governance and fees
  • Offers tools for other DEXs to implement

Volume by DEX

The DeFi Stack: Payments

Composability enables aggregators to stack DeFi building blocks, creating new payment applications

Challenges Beyond DeFi: Cross-Fi

What’s holding #DeFi from mass adoption today?

  • Availability of fiat on / off ramps
  • Lack of financial privacy
  • Scalability / high gas costs
  • Smart contract / technical risk (and lack of insurance)
  • Lack of identity / credit scores leading to over-collateralization requirements
  • Friction around UX / UI

Scalability / high gas costs

Multiple scalability solutions coming to market will enable more gas-intensive use cases

Lack of identity / credit scores leading to over-collateralization requirements

Differing approaches based on the applicant’s credit profile:

  1. Unbanked or “thin-file” (no significant credit history or identity)
  • Alternative credit scoring (Tala, CELO) - Rental, phone, TV payments, Bank account information (deposits/withdrawals), Social media / mobile phone data, Public address credit history (Graychain)
  • P2P / social vouching (VouchForMe)
  1. Existing credit, but no blockchain identity / credit score

A proof-of-stake smart contract platform that allows people to send value to each other with only a phone number

Reputation is attached to phone numbers and measured through the use of EigenTrust, a P2P reputation management algorithm based on mobile phone data and attestations

Celo allows for multiple stable-value currencies where each coin is pegged to a measurable value such as the Dollar, Euro, the price of a barrel of oil, etc.

cGLD, the native digital asset of Celo, is an ERC-20 compliant token and will be partially used to fund the reserve

Smart contract / technical risk (and lack of insurance)

MakerDAO has established a security roadmap for the upcoming Multi-Collateral Dai launch, showcasing best practices:

Emergent solutions like NexusMutual provide “smart contract cover” to secure risk and potential bugs in code (i.e. DAO hack or Parity multi-sig freeze)

Availability of fiat on / off ramps

Increasing competition should lead to fee compression

Centralized

Fees n/a
$2.99 with bank or 3.99%with credit/debit*
0.75% transfer fee, or miner fee
3% on purchase of up to $250

Non-custodial

  • Peer-to-peer trading platform to facilitate the sale/purchase of crypto for fiat
  • Uses smart contracts to lock up crypto assets and wire transfers for payments
  • Only available with European banks, where Open Banking Laws allow oracles to verify transactions and notify smart contracts to unlock assets
  • Fees are up to 3% of the transaction
  • Currently only supporting ETH and DAI

Friction around UX / UI

“Over 90% of users who try to use a dApp will give up when told they need to download Metamask”

  1. Wallet SDKs enable a Web2 login experience with a username and password, removing the requirement to download a separate extension in order to use the app
  2. Smart Contract Wallets can be programmed to have the same security guarantees as a traditional bank (account recovery, fraud protection, and withdrawal limits). Implemented via Smart Contract Wallets, Meta transactions allow users to use dApps immediately via sponsored gas fees, removing the need for users to pre-purchase crypto or install a browser extension

Wallet SDKs

Smart Contract Wallets

Lack of Financial Privacy & Auditability

  • proof of solvency, capacity-specific keys
  • supersonics, bulletproof, zether, authenticated data structures
  • privacy vs. regulatory compliance

Harmony’s contribution to DeFi & Cross-Fi

Harmony’s contribution to DeFi & Cross-Fi
  • Fiat Integrations & dApp Payments via Carbon
  • Developer tools to port EVM compatible dApps
  • Bridges from ERC20 / BEP2 to native ONE token
  • Lower gas fees w/o sacrificing decentralization
  • Unbiasable randomness
  • Decentralized exchange functionality

Gateway: dApp Payment & Fiat Integrations

Carbon is helping issue a FDIC-insured stablecoin native on Harmony. dApps can enable any purchases in ONE tokens using Apple Pay and credit cards in a few lines of code.
  • 30-second fiat on-ramp to ONE
  • Harmony-native stablecoins
  • 5-line code to integrate
Scalability: Reduction in gas fees

Decentralized market makers via Hummingbot

  • Open finance, open source
  • 102 decentralized market makers constituting 8% of ONE volume
  • for arbitrage, dex, algo trading

Developer Tooling

Harmony cross-chain bridge

  • Gateway to swap $ONE BEP2 tokens to ERC20, and in the future, ERC20 to native mainnet $ONE tokens
  • Providing better liquidity for the $ONE ecosystem
  • Enabling cross-chain interoperability

Randomness vs. Fairness

  • States/moves stored on chain
  • Unbiasable dice for random puzzles as fair tournaments
  • Built-in staking & betting

Current challenges within cross-border payments

Remittance cost drivers:

  1. Inefficient correspondent banking systems
  2. Lack of market competition in certain corridors
  3. Regulation and compliance costs
  4. Agent network infrastructure

Estimated $32 billion in remittances aren’t sent due to high transactional costs associated with cross-border money transfers

Cross-Fi: DeFi meets Cross-Border Payments

Current challenges:

Slow

Multi-hop money movements between correspondent currency pairs can take between 1-5 days to fully settle

Limited accessibility

Cash dependent transactions rely heavily on local distribution, which is scarce, especially in rural areas

Limited trust

Last mile transfers rely on fragmented P2P networks with centralized counterparties

Friction across geographies / markets

Current digital payment solutions can be limited in coverage (i.e. Grab cannot be used in China)

Harmony offering:

Finality

Harmony provides instant finality, reducing settlement time to seconds vs. days

Digital wallets

1.7 billion adults remain unbanked, yet two-thirds of them own a mobile phone1

Trust layer

Cryptography, combined with Harmony’s immutable ledger, provides trust without the need for intermediaries or centralized 3rd parties

Borderless

Fully compliant regional solutions combined with low cost fiat on and off ramps reduce geographical frictions

Harmony’s Cross-Fi Solutions Roadmap

Research

Cross-Fi:

  • Transaction value proposition (settlement, peg, rates, identity)
  • Financial products with China / India / Vietnamese currency pairs
  • Remittance, billing, payroll in Europe

Privacy

Ring Signature Implementation on Harmony, enabling obfuscation of transactions behind a group of similar transactions

Audible privacy financial transactions with Findora collaboration

Tooling

Cross-border payment stack (lending, identity, stablecoins)

Simplified on-boarding experience to enable mass adoption

Development of fiat on / off ramps and exchange venues

Adoption

Decentralized credit facility platform, where users can use ONE as collateral to mint various fiat-pegged stablecoins

Cross-border payment applications leveraging Harmony’s scalability, fast finality, decentralization and low transaction costs

Help us build the future of Cross-Fi

Meet our team in Silicon Valley or in our upcoming partnership roadshows:

Harmony India Roadshow

China

  • Beijing Office Q4 2019
  • Shanghai Dec 2019 - Jan 2020

Links:

Appendix

Wave Financial is a diversified asset manager built to bridge the gap between institutional capital and the digital asset markets

Index

  • Select 20 Index + Digital Fund in Q1 2019 and BTC Income & Growth Digital Fund in Q2 2019 launched
  • Roadmap contains 14 other digital security issuances within the next 24 months

Fund

  • Early-stage crypto hedge fund started by the Founder of Wavemaker Partners
  • Invests in both equity and tokens of early stage companies and cryptocurrencies

Harmony: Solving the Quadrilemma

Achieving scalability, security, and decentralization is not an impossibility but an expansion of the triangle through great engineering. We add privacy, the fourth critical dimension.

Decentralization: Origin of 1,000+ Nodes

  • 80% nodes by community
  • 56% first-time operators
  • 56% first-time operators
Harmony’s program, Pangaea, onboards hundreds to run a network node for the first time.Consensus is meaningless without participation; tools are the most powerful equalizer.

Quadratic Voting vs Capped Median

  • Cap #stakers to network seats
  • Median decides effective stake
  • 15% cap on top stakers from overtake, bottom from apathy

Harmony presents a new staking scheme called Effective Proof-of-Stake, preventing top stakersfrom overtaking the network; and boost bottom stakers out of voter apathy.

O(1) Secure Resharding

  • O(n2) view change, blocks in 1.3s
  • O(n2) view change, blocks in 1.3s
  • Verifiable Delay Function from scratch
Harmony is among the first production mainnets with Proof-of-Stake and sharding. We productionize state-of-the-art research and implement from scratch the verifiable delay functions (VDF).

The DeFi Stack: Lending Counterparties

Speculating / hedging

Gaining additional exposure to a digital asset with leverage, shorting when you believe one may be overvalued

Trading / arbitrage

Taking advantage of arbitrage opportunities across exchanges

Tax deferment / working capital

Selling a coin for fiat may trigger a tax bill, whilst selling a borrowed coin may not

*composition as of Q3 2018, used for illustrative purposes on potential types of counterparties

Not all protocols are created equal: degrees of centralization within DeFi

The DeFi Stack: DEX

DeFi Liquidity Models

Harmony