Why Nervos will be the right blockchain for your DeFi project

Decentralized finance, or DeFi, is an umbrella term for the different ways blockchain and cryptocurrency is disrupting traditional financial services and systems. DeFi is still in its infancy, making it a hot topic of conversation in blockchain communities and experts. Our co-founder Kevin Wang has even shared his thoughts and predictions on the space.

On September 15th 2020, we held our first Town Hall for the Nervos community. Jan Xie, chief architect and researcher, introduced the product roadmap for the remainder of 2020 and answered questions from the community with the help of co-founder Kevin Wang.

The presentation focused on a few main topics that are reflected in the product roadmap: DeFi, infrastructure, research and development, and Interoperability 2.0. Jan shared ongoing developments in the Nervos ecosystem, including our plans for DeFi as illustrated below.

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4 Reasons Why Nervos is Ideal for DeFi Development

Our “Layer 1 for Layer 2” approach

Nervos is the first Layer 1 blockchain designed for Layer 2 protocols. Architect and researcher Jan Xie says that, “because the design of Nervos blockchain pushes many functions to the upper layer, DeFi on Nervos will naturally rely more on open transactions (“layer 1.5”) and layer 2 protocols.” This makes it an ideal playground for current and future blockchain developers to join the nascent DeFi ecosystem without worrying about congestion and a degraded user experience.

With its layered architecture, the Nervos Network can scale on Layer 2 to any number of users, while still maintaining the vital properties of decentralization and asset preservation—both of which are essential for DeFi applications. 

CKB was also built with flexibility in mind, which as our co-founder Kevin Wang points out in his piece about the future of DeFi, “...is essential to service the continually growing use cases [in the DeFi space].” CKB was designed to be future proof; its core functionality can be permissionlessly upgraded by developers. This allows for new layer 2 innovations (like zk-rollups) to be supported without requiring hard forks.

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PoW’s Advantages in the DeFi space

In order for Layer 1 to be as decentralized, secure, and neutral as possible, PoW is the only viable option for CKB, as it has already secured billions of dollars without incident. We also know that miners commit in advance to securing a PoW blockchain through the purchase of hardware.

In a PoS system, a blockchain is protected by staked cryptoassets instead of by hash power. While PoS has been designed to increase scalability and reduce power consumption, its security model is not yet understood. When lots of coins are actively staked, the system is secure. However, if users unstake their assets because they believe they can get a better return elsewhere, then the network loses security.  

Haseeb Qureshi, managing partner at Dragonfly Capital, argues that on-chain lending markets, one of most popular DeFi use cases today, directly compete with staking—“meaning they directly compete with the protocol being secure!” 

Furthermore, derivatives markets make attacks by validators easier to execute in PoS. Issuance must regularly be adjusted to incentivize users to stake, making a fixed issuance schedule not possible.

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Nervos’ economic model solves the problems DeFi projects face

Sustainability is one of the core values of Nervos, and our researchers and architects took it into consideration when designing the economic model.

Ultimately, we believe a token’s value is derived from its core function or utility, not its position as a payment token. The Nervos CKB is designed to translate demand for a multitude of assets into demand for a single asset, and then use it to compensate the miners securing the network.

The economic model of the CKB allows issuance of the native token to bound state growth, maintaining a low barrier of participation and ensuring decentralization.The native token of the Nervos CKB is the "Common Knowledge Byte", or CKByte for short, and it entitles a token holder to occupy part of the total state storage of the blockchain. For example, a user holding 1000 CKBytes can occupy 1000 bytes of the blockchain.

The common "pay once, occupy forever" storage model doesn't match the ongoing cost structure of miners and full nodes, and the model provides no incentive for users to voluntarily remove state or remove state sooner. Many smart contract chains have experienced rapid state size growth, which raises the operating cost of full nodes, diminishing the decentralized nature of DeFi. Without any strong incentives to remove state, this is a trend that's bound to continue.

As CKBytes become a scarce resource, they can be priced and allocated efficiently. Nervos CKB also includes a special smart contract called the Nervos DAO, which functions as an "inflation shelter" against the effects of the secondary issuance.

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CKB is bridging permissoned and permissionless blockchains

While the ethos of blockchain is transparency, there are times when privacy and security matter even more—especially as it pertains to real-world financial use cases.

Nervos’ layered architecture offers the opportunity to create regulatory compliant portions of an unregulated, permissionless blockchain. For example, users can store their decentralized assets on Layer 1, enjoy property ownership of these assets, and also process real-world business use cases on Layer 2, where they are subject to regulatory and legal constraints.

The layered architecture of Nervos will also make it easier for future projects to customize their DeFi apps for different regulatory conditions in different countries and regions, while CKB—the fundamental layer—will remain neutral.

Today, Nervos is working with private organizations and other blockchains to bridge the regulatory gap and offer DeFi services:

  • China’s Merchants Bank International (CMBI). One of the world’s largest banks, with a market capitalization of $130+ billion, plans to tap into Nervos Network and its native CKB architecture to power future decentralized finance (DeFi) applications. Some of the areas that CMBI is exploring with blockchain include the tokenization of assets, payments and identity verification.
  • Huobi Group. The leading global blockchain company has partnered with Nervos to create Huobi Finance Chain (HFC). HFC will be a regulator-friendly, high-performance financial blockchain that allows enterprises, financial institutions, and exchanges to deploy their own blockchains, tokenized assets, and DeFi services.

As we continue to carry out our plans for a “DeFi playground,” we’ll keep you updated on our progress.

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If you are interested in building on Nervos, check out our CKLabs incubator, Grants Program or get in touch!

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