Nervos CKB: A Foundation for Decentralized Finance

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Nervos CKB: A Foundation for Decentralized Finance

Photo by Joshua Rawson-Harris on Unsplash

This is the second in a series of blog posts exploring the key ideas behind the development of Nervos. Each article will alternate between a core tenet of Nervos’s governing philosophy, and a use case that illustrates how these principles are intended to work in practice. Today, we focus on a major Nervos use case: decentralized finance (DeFi).

The Growth of DeFi

DeFi was one of the first use cases to be identified as an area where blockchains could significantly improve efficiency, transparency, and trust. The term DeFi refers to the application of decentralized networks to handle financial transactions. An estimated 1.7 billion people globally lack access to financial services — and consequently miss out on participating in the enormous wealth generation potential of the global economy.

DeFi promises to end this exclusion by eliminating the need for centralized gatekeepers. This can help the unbanked through access to P2P fund transfers and loans without the need for analog forms of identity proof such as birth certificates, which many people in developing nations lack. DeFi additionally has the potential to “rewire” global financial markets to run on decentralized networks with smart contracts, bringing the blockchain’s cutting-edge capabilities to bear in a space whose basic contours date back to the Italian Renaissance.

There is no shortage of groups working to bring DeFi apps to market. Some projects (for example, MakerDAO) have gained prominence on top of existing blockchains. Legacy tech and finance giants, including Facebook and JPMorgan, have also announced ambitious plans to enter the market.

DeFi and the “Trilemma”

Like many blockchain use cases, though, the growth of DeFi has been hampered by the so-called “trilemma.” The problem many developers continue to encounter is that security, decentralization, and speed appear in many cases not to be mutually compatible. In order to achieve meaningful improvements in transaction processing speed — essential for applications handling financial assets that trade by the second — many have concluded that a large degree of centralization is unavoidable. But this nullifies the main reason for having blockchains in the first place.

In order to have a meaningful impact, DeFi applications must find a way of maintaining decentralization while handling very large transaction volumes. For context, Visa, one of the largest incumbent players in traditional financial markets, is capable of handling roughly 24,000 transactions per second. No blockchain currently comes close to this. Nervos is specifically designed to.

Nervos is Designed to Handle Large Transaction Volumes

From the beginning, we have designed Nervos as a multi-layer network, with Layer 1 reserved for the essential function: store of value. This allows transactions to take place on Layer 2, where they can be processed much more quickly.

Considering the volume and frequency of global financial trading, this is an essential feature, and one that cannot be replicated by any other blockchain at present.

Storing value in Layer 1 and lifting transactions onto Layer 2 also parallels the structure of many types of financial transaction. Buying, selling, and trading financial instruments — from cross-border remittances to public or private equity, bonds, real estate, mutual funds and all the many layers of derivatives that can be built on top of these — involves large volumes of transactions between many people, often across borders and currencies. It also — in cases like tokenized equity or real estate — means executing and exchanging contracts relating to large, high-value, immovable assets. On Nervos, the asset — the company, the commercial building — is stored safely on Layer 1, while the many transactions driven by the asset can take place quickly and efficiently on Layer 2.

DeFi dApps on Nervos

Nervos’s Lina mainnet is live and our team is engaged in discussions with businesses and developers to build products on the Nervos blockchain. We expect decentralized finance applications to make up a significant portion of the projects developed on Nervos. We will share news through our official channels of specific products as they become official.

Scalability is the Name of the Game

Nervos was designed to scale. Our multi-layer architecture offers a solution to the trilemma that has blocked other networks from achieving true scalability. Simultaneously, our Proof-of-Work design and innovative tokenomics take into account the risk of state bloat arising once scale is achieved. The next installment in this series will explore scalability in more detail, demonstrating the problems Nervos was designed to solve for and the applications — including DeFi — it is built to support. Please check this page for regular updates over the coming weeks.

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