Decentralized Financial Network with Distributed Ledger Techlogies

DeFi, DLT, Blockchain and Cryptoassets in the Capital Market.

The decentralized approach to finance is redefining the role of exchanges and other intermediaries. Market participants form a network in which it is possible to conduct secured transactions between two or more parties (potentially) worldwide. Distributed ledger technology based on the blockchain approach provides the technological foundation. The blockchain was first described in 2008 in the Bitcoin whitepaper. This was published under the pseudonym Satoshi Nakamoto. The actual inventor remains unknown to this day. The blockchain technology has become known over the years, in addition to Bitcoin, through cryptocurrencies such as Ethereum, Ripple, or Litecoin. Products of the capital market can be represented by the participants of these networks as so-called tokens and defined via smart contracts, which technically implement the properties of the product. This technical representation (cryptoassets) allows market participants to trade and transfer the products in direct exchange with lower hurdles, as well as to receive the monetary equivalent. Due to the technical characteristics (e.g. definition of a consensus algorithm) of the blockchain technology, it is possible for the participants in DLT networks to have their transactions verified by the participants and cryptographically secured. In this way, a decentralized financial network with different participants, who do not necessarily have to know each other, can be established in the vision.

Germany and Europe creates the legal basis for DeFi

The eWpG (Electronic Securities Act) came into force in Germany in June 2021. This enables bearer bonds (e.g. certificates) to be entered in an electronic securities register, so that a physical certificate is no longer necessary. It also opens the door for Germany to implement a so-called crypto securities register (Section 16 eWpG). According to the characteristics outlined in the law, this novel form of registry aims to establish a DLT network and thereby lays a foundation for DeFi in Germany.
The European regulatory framework is also starting into the future with the so-called EU Pilot Regime. This forms the basis for European cooperation on decentralized financial networks.

Challenges in building DeFi

However, the implementation of decentralized financial networks using DLT faces a number of challenges. An important and at the same time demanding task is the connection of the participants and their existing infrastructure. The construction of the networks is based on the implementation of nodes that need to be connected to existing solutions. Many use cases of smart contracts require external data (e.g., stock quotes). The Oracle problem describes the problem of feeding this external data (also called off-chain data) securely and validly into the smart contract (on-chain). In addition, operating a blockchain can be energetically demanding and questionable from a sustainability perspective (link to Sustainable Finance). Another hurdle can be the choice of DLT protocol (e.g. private permissioned vs. public) as well as use case to use a DLT technology. The relationship between public and private blockchains is roughly comparable to the difference between intranets and the Internet. A public Blockchain (e.g. Bitcoin or Ethereum) is accessible to any person (censorship resistant). In contrast, access to a private blockchain (e.g. Hyperledger) must be granted. Currently, several DLT-based networks are emerging in Europe and worldwide, some of which use different products as well as different protocols. In addition, a connection to a DLT payment solution (e.g. CBDC or other stablecoins) is also an important factor. Therefore, the interoperability of these networks will continue to play an important role in the future in order to connect the market participants and to avoid isolated solutions for individual products in the long term.

Consileon accompanies DLT projects in the field of tokenization and blockchain

Consileon already accompanies projects with distributed ledger technologies as the basis for the target infrastructure. We have many years of expertise in interface specification and harmonize existing architectures with the infrastructures of the future along the entire value chain. Whether in the issuance process or trading: we accompany you in the conception of business cases or realize your already existing use cases in cooperation with our technological implementation partners. ReneoDLT’s technical expertise perfectly complements Consileon’s knowledge of industry and market structures, enabling us to offer you the best solutions and technologies based on your project and existing infrastructure.

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