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Decentralized finance has emerged as one of the most compelling use cases for blockchain technology in recent years. Its ability to manage financial assets and provide services without the need for centralized banks to authorize transactions and verify customers has laid the foundations for a more accessible and inclusive financial ecosystem that benefits everyone.
The staggering growth of the DeFi industry that has been appreciated more than $77 billion in March 2022, underlines this potential. Despite this, DeFi accounts for a tiny percentage of global financial transactions compared to the world of traditional finance. That means there’s tremendous room for growth, but that won’t happen until DeFi is built on a much stronger foundation.
One of the major weaknesses of the existing DeFi is that it is built on a very shaky and inefficient architecture – namely smart contracts.
It is of course smart contracts that make DeFi possible. They are the underlying code that allows decentralized applications to automate transactions when certain conditions are met, without the need for a middleman. In theory, they are similar to traditional contracts, but smarter as they don’t require enforcement. Rather, smart contracts are programmed to only execute transactions when certain, transparent conditions are met. This allows them to make transactions instantly, much faster than traditional financial systems as no human is required to ensure all requirements have been met. Since there is no middleman, the transaction fees are also much lower.
While they are in fact much smarter, smart contracts are not infallible. One of the biggest challenges is security. Since smart contracts are really just code, there is an ever-present risk of bugs or vulnerabilities slipping through the net. This is not an insignificant risk – was worth billions of dollars lost to attacks on DeFi protocols since the inception of the industry.
Part of the problem is the learning curve for smart contract developers. Smart contracts are made up of incredibly complex spaghetti code, and yet it is necessary to create dozens of them to define the functionality of most DeFi applications. Developers generally need several years of hands-on experience with the Solidity programming language used to create smart contracts on Ethereum and compatible networks before they can even consider building a functional and secure decentralized application.
This amazing complexity is primarily due to the complete lack of platform-level support for digital assets such as cryptocurrency tokens and NFTs. Although DeFi almost exclusively revolves around assets like BTC, ETH, USDC, etc., major blockchain networks like Ethereum, Avalanche, Solana, Cosmos, Fantom, and Binance Chain do not have a native concept of these assets.
Therefore, to help developers create secure and functional dApps faster, there is a need to redesign the foundation of DeFi platforms by reinventing the way smart contracts are created and implemented. Rather than being an afterthought, digital assets need to become part of the DeFi fabric so developers can create and control them with ease without having to write tons of unwieldy code.
Why Native Assets Matter
To understand the importance of asset-centric DeFi, it helps to look at the problems caused by Ethereum’s lack of native assets. With Ethereum, developers deploy smart contracts in their own small area on the network where they can store data that is constantly updated as they process transactions. In this architectural model, every single function in DeFi must be implemented as a smart contract. There is no other way. So, a token like ETH is represented as a smart contract that tracks wallet balances, while a multi-sig account is another smart contract that needs to be signed with multiple public keys in order to perform an action. Token swaps, loans, liquidity pools – you name it – they are all implemented as smart contracts.
With DeFi, these smart contracts all communicate with each other over a complex messaging network to perform even the simplest of functions. For example, a smart contract that includes some tokens needs to communicate with a second contract that implements that token separately, through a list of balances and methods for adjusting those balances. To make this possible, the Ethereum Virtual Machine application environment allows smart contracts to send messages to each other. This makes smart contracts composable, meaning developers can connect them together in a way that allows them to perform complicated transactions in a coordinated manner.
This is the foundation of modern DeFi, but it’s terribly inefficient as every single function is implemented in a smart contract silo. This results in millions of messages constantly flowing back and forth across the network, requiring complex logic to take the right action in response to each one, and a stream of ever-changing data stored in each smart contract , who keeps a record of all the transactions they conduct.
The existence of DeFi applications like Uniswap and Curve tells us that this architecture works, but that doesn’t necessarily mean it works well. On the contrary, numerous DeFi hacks show us that it is a terribly inefficient model that poses really dangerous risks for its users.
However, what is evident is that these interactions between digital assets are the basis of every single DeFi transaction. So it stands to reason that an asset-centric DeFi architecture would be far more efficient.
The Advantage Native Assets
This is the basic theory behind it radixan innovative smart contact platform built specifically for DeFi treats assets as a key attribute of its platform rather than implementing it in silos at the smart contract level.
Radix transactions are executed within the Radix Engine application environment. The main difference is that Radix Engine creates assets like tokens by requesting them directly from the platform along with their specific parameters.
In other words, radix-based tokens like XRD are not formed as entities on thousands of separate balance sheets, but are instead treated as physical objects that are stored in “vaults” or accounts and moved between them as transactions are processed. These vaults are directly controlled by their users, unlike EVM, where a person’s tokens can be spread across multiple smart contracts that hold the entries for their public keys.
The physicality of this behavior is based on a finite state machine model (FSM) that securely tracks tokens as they move between users’ vaults, much like a delivery service tracks customer orders. It’s a simplified transaction model where the user essentially tells the platform that they want to send the tokens they own to a specific vault. Users need to send a message from one smart contract to another and trust them to update their balance entities. In this way, mistakes such as double-entry accounting can be avoided, as they are simply not possible within this architecture.
In short, this is the foundation of Radix’s asset-centric DeFi architecture. It creates a far more intuitive, user-friendly model for token transactions that eliminates a ton of complexity and makes DeFi inherently more secure than the traditional model.
The model is so radically different from traditional DeFi that Radix reinvented smart contracts as “components.” Because they are modular, composable, and have clear functions, Radix’s components can be thought of as “Lego bricks” that developers can use to easily assemble their DeFi apps step-by-step, even if they don’t have experience with them the Scrypto programming language.
Conclusion
Radix’s asset-centric approach to DeFi allows developers to use built-in resources to handle most of their smart contract functionality. Therefore, radix-based DeFi is not only simpler and more secure, but also far more composable and reusable than traditional DeFi. Instead of writing specialized code to define every little thing of their dApp, developers can simply build their dApps from their resource library.
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