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Codefi

NEWSLETTER #2: SKALE token launches on Activate platform; and analysis of Central Bank Digital Currencies

by Nicole AdarmeFebruary 10, 2020
codefi feature

Hey there!,

Since our launch five months ago, the ConsenSys Codefi team has been cooking and coding up some delicious treats for you all. We’re incredibly excited to announce TODAY the partnership between our Codefi Activate project and SKALE Network

Also in our newsletter, our Co-Head Lex Sokolin breaks down central bank digital currencies (CBDCs), which were a hot topic this year at the World Economic Forum annual meeting in Davos, and will likely be a driving narrative this year as Facebook, JP Morgan, and other financial institutions seek to issue fiat-backed digital currencies.


Project Highlight – Codefi Activate: SKALE

We are proud to announce today that the N.O.D.E. Foundation has partnered with Codefi Activate to support the launch of the SKALE Network, a decentralized elastic blockchain platform for securely scaling Ethereum based dApps. We are excited to support the SKALE developer community and growth of the network from genesis.

Activate, by ConsenSys Codefi, is the first platform designed to launch decentralized networks and allow customers to purchase, manage, and use their tokens — all in one application. Today, Activate, along with its keystone partner, SKALE, announced the upcoming launch of the SKALE Network, a decentralized elastic blockchain platform for securely scaling Ethereum based dApps.

The N.O.D.E. Foundation will conduct a use-focused token auction coinciding with its Phase 1 mainnet release. This auction will allow participants to become SKALE token holders and enable them to join the SKALE network as a validator or delegator through the Codefi Activate platform to provide network security upon the launch of Phase 1.

Pre-register for the SKALE token launch on Activate and create an account in a few seconds. 


Quick Codefi Hits


 “Future of Finance” – Central Bank Digital Currencies

from Lex Sokolin, Global Co-Head, ConsenSys Codefi

The biggest Fintech meme of the year appears to be the return of Central Bank Digital Currency (“CBDC”). I’ve covered the idea before, but always with this skeptical lens of — a sort of presumption that some masked *they* will never allow it. At the same time, water beats rock in the repeated game of wave and tide. What Bitcoin accomplished 2009 is now really, truly, and actually being considered as a type of infrastructure for all of our global money.

There are many analogies we can make. Often, my favorite is how Spotify ate both Napster (principled open source pirates, i.e., BTC) and the music labels (DRM enforcing manufacturers, i.e., Wall Street) to build a thin layer on top of free digitized music. Spotify, in part, was so successful because it removed friction for music listeners around the world. With the fundamentals of blockchain, the question now becomes what can we do with our society and economy if we remove 85% of the friction behind the movement of money? 

However, this has implications beyond expanding the money supply. It’s important to understand that a programmable blockchain-based infrastructure impacts every single vertical of financial services. Whether we are talking about payments, or savings, or lending, or investing, or insurance — you get to remove the same frictions in each of those industries. These industries will spring up along whichever road the money travels; it brings life like water in a desert.

Don’t take my word for it. Read the newly published World Economic Forum guide for Central Bank policy makers trying to design a CBDC (definitely worth a download).

It’s not appropriate for me to copy/paste all of the WEF report, but let’s identify some key concepts. The first is to acknowledge the split between (1) retail and (2) wholesale money movement (see for example, Australia’s new initiative). The institutional payments market is about 3-8x the size of the retail one, depending on your source. In terms of the feature set, retail payments require very many small simultaneous transactions, while institutional payments are generally not as high-volume, but much larger in size. This also has implications for scalability and privacy, both of which require additional solutions if using blockchain-based systems. These solutions exist, but must be chosen and adopted.

Second, there is a difference between national and cross-border CBDCs. Moving into the international arena creates exponential complexity, and certainly fuels the Fintech regulation and reserve currency wars being waged by the US, UK, China, and continental Europe. Lastly, the launch and technological support of direct money issuance by Central Banks to individuals creates a financial industry risk. Money would take a step closer to regular human beings, making banks less useful. How exactly reserve banking, interest rate policy, and other traditional macro-economic levers continue to work becomes an open question. Similar questions arise for the technology providers of core banking systems, payment networks and processing, and portfolio management.

 


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Let’s also look at the recently published ConsenSys whitepaper on CBDCs, and how they can be implemented on Ethereum. I am of course conflicted in telling the story here. That said, I am conflicted for a reason — which is that I believe strongly that a programmable, open source, public blockchain with the options for private deployment, and add-on privacy and scalability, is the best shot we have at actually re-building financial infrastructure. Being open-source at the core (vs. partially open-source) implies the largest community of developers and the most cumulative innovation. You can look at the consumer surplus created by Linux, and its conquering of the world in the guise of Android for proof.

Further, a public chain that can be flexed into private institutional use-cases but still retains the native ability for tokenization and digital asset interoperability is more powerful than those built only for financial corporates. You don’t need to choose the crypto Wild West today. But why would you permanently kill the option of inter-operating with one of the most innovative Fintech ecosystems in the world? And programmability is key — otherwise, you are just stuck with a single financial product. There are hundreds of financial permutations that people need, each interacting with the next (e.g., a payment and a loan).

But I digress. The core graphic for a CBDC on Ethereum is below, with a discussion of the architecture quoted directly from the paper. The resulting product can be built out of modular software like ConsenSys Codefi (which I co-lead) and deployed via infrastructure like Infura and PegaSys. Other solutions, like those from PwC or JPMorgan are also on the market.

  1. Base settlement layer (dark blue). There is one base settlement layer on a permissioned Ethereum blockchain.

  2. Layer 2 (light blue). The next layer is comprised of a network of state channels between intermediaries that would enable fast payments.

  3. Layer 3 (green). In this layer each intermediary operates its own side chain, where the central bank or regulator is a participant and can ensure that the supply of money remains consistent with the supply of CBDC allocated to the intermediary in the base settlement layer

  4. Layer 4 (tan). At the top we find many different end user interfaces, offered by banks, telecom operators, mobile phone manufacturers, fintechs and other providers, each in competition with each other and with their own special functionalities, in order to provide the best possible end user experience via competition between these private providers.

It’s fantastic that the world’s Central Banks are actually engaging with these concepts and trying to make operating decisions about the economies which they have a duty to grow and maintain. Notably, this is not innovation for innovation’s sake. Private solutions are already far ahead, attempting to generate profit through the maintenance of private moneys. It is not that algorithmic stablecoins and collateralized digital dollars will somehow lead to capital appreciation. They won’t, because they are pegged to fiat. Deviating from the peg is a fundamental failure, and maintaining the peg is expensive (just ask the Bank of England about Soros). Rather, owning the rails and wiring around those stablecoins is what is profitable.

For example, Facebook’s Libra may generate billions of dollars of interest income from its projected massive reserves. While some companies like Vodafone have pulled out of the Libra consortium, technical and business development is still moving forward, and is now governed by an explicit Steering committee.

There is a whole plethora of other private approaches to try and benefit from digital currency scaffolding. See Jack Dorsey’s Square Wins Patent for Fiat-to-Crypto Payments Network, trying to solve how people move money between digital and blockchain-based payment systems. On-ramps generate fees and profits! Or see WisdomTree, an asset manager with $60 billion in assets under management working on a regulated stablecoin. If you can create a money market fund on a digital asset chassis, maybe you can package up the allure of Bitcoin into an ETF, which is then allocated into the $30 trillion of American investment portfolios.

For me, the important takeaway is that money is a public good. It is the blood of the political body in which we live — wherever your body may actually be. In some cases, we may wish to switch political bodies, for example escaping Venezuela’s socioeconomics for the promise of the decentralized web and its financial ecosystem. Yet for nearly everyone in the world, we are rooted in our countries. And if our countries build out a new commons for digital money, the next 10 years will see more than just 85% cost reductions in payment costs. Fintech and financial services is yet to see such changes — but CBDCs could open up entirely new frontiers for innovation, and remove regulatory and technological barriers. Such innovation will spread to billions of people, and gently put into the dustbin of history our baroque era of finance.


Final Remarks

That was a whole lot of newsletter, so thanks for sticking with us. We’ll be at ETHDenver this weekend and hope to see you there! In the meantime, follow us on Twitter, learn more on our website, and let us know your thoughts. Whether you’re interested in working with us, for us, or you just want to say hello, please feel free to contact us.

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Till next time, 

The ConsenSys Codefi Team


 Previous Codefi Newsletters

Did you miss a newsletter that you really wanted to read? Is it a rainy Sunday and you want to dive deep into the archives of decentralized finance? Don’t worry, we’ve got you covered with our repository of past Codefi newsletters


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About ConsenSys Codefi

ConsenSys Codefi is the blockchain operating system for commerce and finance, built to optimize business processes and digitize assets and financial instruments. We combined elements of digital assets and tokenized securities, crypto payments processing, enterprise finance blockchain, and the emerging frontier of decentralized finance to build a global software enabler for the new financial infrastructure. Think Twilio, for blockchain-based finance.

Codefi contains four core modules:

  • Assets: A platform to create, issue, and manage the lifecycle of digital assets, associated markets, and digital financial instruments on public or permissioned blockchain networks.

  • Payments: A platform to send, receive, and manage cryptocurrency payments and revenue within a single dashboard. 

  • Networks: A suite of tools empowering anyone to utilize tokens and participate in decentralized networks.

  • Data: A data, analytics, and risk management engine for digital assets, public blockchain tokens, and their growing networks.