As a biz journalist, Trine has covered finance from NY, tech from Silicon Valley, and the blockchain space.
The massive $40 million hack of Binance by a scam DeFi project is the most recent reminder that no corner of cyberspace is safe from cyber thieves. With a rise in fraudulent DeFi projects and coins, users are understandably more concerned about data protection and privacy.
The increase in data breaches begs the question, can the financial services industry regain control of online data? So far, traditional financial services providers have failed to win the battle against cyber thieves.
Unsurprisingly, the decentralized finance industry has become the newest target. Users of DeFi platforms have lost money and data to breaches and fraudulent activities by the platforms themselves. Fraudsters, after all, follow the money. The amount of financial assets flowing into DeFi applications, called DApps, has exploded this year.
In DeFi, data privacy invaders may have met their match. Next generation blockchain technology is building smarter security solutions on open, privacy-preserving protocols.
Like DeFi, DeFi fraud is borderless, making data privacy all the more important. In the last few months, regulators froze $2.3 billion in funds of a top 10 crypto exchange for five weeks. U.S. securities regulators sued a $92 million crypto arbitrage hedge fund for falsifying fund exchange balances. And a Chinese investment site was closed down after investors lost $2.5 billion in a Ponzi scheme.
As is often the case, investors were left in the dark about any financial irregularities until access to their financial services or wallets was blocked. The information asymmetry is surprising given the transparency, immutability and traceability of blockchain transactions. All participants — the financial services providers and users — should have access to the same information.
Beyond transaction management, financial services on the blockchain has remained a black box. What’s missing from DeFi is synchrony of all financial functions with the transparent public blockchain infrastructure.
Fully Transparent and Synchronous Financial Services
When all financial functions are placed on smart contracts on the digital ledger, true information asymmetry and transparency will be achieved. The blockchain becomes the financial institution.
Imagine an exchange or lender proving its solvency, a fund accounting for all fund flows, or an investor with a universal digital identity reporting credit defaults transparently on the blockchain. This information would be publicly auditable yet confidential at the same time. The blockchain can deliver this more transparent financial services world but currently its full potential is significantly under-utilized.
Financial services have no choice but to move to the blockchain if they want to remain competitive. Owing to the transaction speed and lower costs, thousands of major investment funds are moving administrative functions to the digital ledger. Yet until now, financial institutions have been reluctant to place their full operations on the blockchain due to privacy and confidentiality concerns.
Findora is one of the new blockchain architectures solving the conflict between openness and privacy to support fully open financial services. The Findora blockchain enables both transparent and confidential financial services on a cryptographically secure financial ledger. Findora employs a three layer protocol to support open privacy-preserving financial services.
Distributed Fully Participative Consensus
Layer 1 is the consensus protocol. The financial institution is still vulnerable to corruption if influence is not distributed fairly among the network participants. How many Chinese investors would have agreed to invest in the PonziToken protocol? The protocol scheme was allowed to flourish due to a lack of strong decentralized governance mechanisms to ensure the DApp operated in accordance with the mandate of its protocol.
Findora employs a stack of consensus mechanisms to place more governance power in the hands of the financial services users. Its synchrony consensus model reduces the opportunity for corrupt actors to influence the network. The system includes a mechanism to randomly select validators, corruption tolerance to control the maximum number of seats that can be controlled by corrupt validators, and responsiveness so that transaction blocks are confirmed at the speed of the network to provide instant finality.
On the blockchain, data ownership and privacy are fundamental individual rights. Public blockchains, therefore, must balance the expectation of transparent, trustless financial services with the need for privacy and compliance.
Findora makes publicly audible yet privacy-preserving financial services possible through multi-party computation (MPC) and specialized zero-knowledge proofs (ZKPs). MPC allows multiple parties to compute a function while keeping the data inputs private.
ZKP allows a prover to prove to a verifier that information is true — amount X was received — without revealing any further transactional and personal information, like personal income for accreditation on an investment site or credit score to secure a loan. Instead, the prover demonstrates through cryptographic algorithms that a computational statement is true.
Findora employs a network of validators to enforce the rules while distributing trust. Validators are chosen through a verifiable random function (VRF) protocol to ensure no undue influence is exerted in the validation process. Employing an adaptive security protocol, a validator announces his election and casts a vote at the same instance in time.
These protocols are the basis of Findora’s Passport personal identification system. Counterparty risk is high in DeFi owing to the high volume of P2P transactions. In the case of the hedge fund recently shut down by the SEC, the manager stole money to pay off a counterparty, a Chinese loan shark. Investors should not only have knowledge of the counterparties they directly do business with, but also the counterparty exposure of the platforms they do business on.
A Passport identity can be linked to any ledger address, negating the need for users of financial services to provide personal identity information for each site they sign up for. To ensure information privacy, the credential is randomized before being added to the identity registry.
Financial Service Applications
Upon the Findora consensus and privacy layers, any decentralized financial application called Finapps can be built. Any use case is possible with full support for any financial asset — crypto and fiat currencies, equity and debt instruments, derivatives, and so on. Applications built on Findora and their side ledgers are interoperable.
One of the innovative financial applications balancing transparency and privacy is the Smart Investment Fund (SIF). The fund operates off a smart contact where all transactions and money flows can be recorded and tracked. The ZKP and MPC protocols allow both investors and regulators to ensure compliance while maintaining confidentiality.
Blockchain platforms built on Findora are fully interoperable. Interoperable blockchains are unleashing the true power of DeFi, allowing investors to seamlessly trade, lend, and stake tokens while seeking the highest yields across DeFi DApps.
For this interoperable environment, Findora has created a new species of digital asset token. Similar to the non-fungible token (NFT) that represents unique digital identifiers for, say, your digital collectibles in a gaming world, financial services can ascribe unique digital identities to Findora tokens called anchors through the Smart Asset Framework (SAF) programmable token protocol. Any asset can be tokenized with unique identifiers and tracked. For example:
1. Alice transfers to Anchor Z her security token from Anchor X
2. Anchor Z issues its own security token to Anchor Y
3. Anchor Y issues its own security token to Bob
Many technologies are sold before their time. Only three years ago, smart glasses and QR codes were written off as technology failures. Today, both are playing growing and important roles in data authentication and validation in blockchain networks in industrial and commercial applications.
Similarly, many early blockchain infrastructures will inevitably be replaced. Findora has set out to build the next generation public blockchain infrastructure to secure the future of secure and confidential decentralized finance.
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