Balance

Abstract

Financial deposits are fundamental to the security of cryptoeconomic protocols as they serve as insurance against potential misbehaviour of agents. However, protocol designers and their agents face a trade-off when choosing the deposit size. While substantial deposits might increase the protocol security, for example by minimising the impact of adversarial behaviour or risks of currency fluctuations, locked-up capital incurs opportunity costs. Moreover, some protocols require over-collateralization in anticipation of future events and malicious intentions of agents. We present Balance, an application-agnostic system that reduces over-collateralization without compromising protocol security. In Balance, malicious agents receive no additional utility for cheating once their deposits are reduced. At the same time, honest and rational agents increase their utilities for behaving honestly as their opportunity costs for the locked-up deposits are reduced. Balance is a round-based mechanism in which agents need to continuously perform desired actions. Rather than treating agents' incentives and behaviour as ancillary, we explicitly model agents' utility, proving the conditions for incentive compatibility. Balance improves social welfare given a distribution of honest, rational, and malicious agents. Further, we integrate Balance with a cross-chain interoperability protocol, XCLAIM, reducing deposits by 10% while maintaining the same utility for behaving honestly. Our implementation allows any number of agents to be maintained for at most 55,287 gas (≈ USD 0.07) to update all agents' scores, and at a cost of 54,948 gas (≈ USD 0.07) to update the assignment of all agents to layers.

A Taxonomy for Decentralized Finance

“…As DeFi is an enabler of networked ecosystems (Schär 2021), research on such networked (Buterin 2014;Chen et al 2020;Cherecwich 2021;Cong et al 2021;(Buterin 2014;Chen et al 2020;Cherecwich 2021;Cong et al 2021;Cousaert et al 2021;Domingo et al 2020;Egelund-Cousaert et al 2021;Domingo et al 2020;Eskandari et al 2020;Grant et Müller et al 2017;Eskandari et al 2020;Grant et al 2020;Guerar et al 2020;Halden et al 2021;Harz al. 2020;Guerar et al 2020;Halden et al 2021;Harz et al 2019;Jensen et al 2021;Jung et al 2019;Kaal et al 2019;Jensen et al 2021;Jung et al 2019;Kaal 2021;Kim 2021;Kumar et al 2020;Lei et al 2019;Kim 2021;Kumar et al 2020;Lei et al 2019;Merwe 2021;Merwe 2021;Mikhalev et al 2021;Nakamoto 2008;Ojog Merwe 2021;Merwe 2021;Mikhalev et al 2021;Nakamoto 2008;Ojog 2021;Pop et al 2018;Popescu et al 2020;Qin et al 2021;Pop e...…”

“…Chen et al 2020; Cong et al 2021; Cousaert et al 2021; Fusion Foundation 2017; Guerar, M. et al 2020;Guerar et al 2019; Halden et al 2021;Harz et al 2019; Jensen et al 2021;Jung et al 2019;Nakamoto 2008) Chen et al 2020;Cherecwich 2021; Cousaert et al 2021; Domingo et al 2020; Eskandari et al 2020; Grant et al 2020; Gudgeon et al 2020;Guerar et al 2019; Guggenberger et al 2021; Jensen et al 2021; Kaal 2021;Kim 2021;Lei et al 2019; Merwe 2021; Meyer et. al 2021; Ojog 2021; Qin et al 2021) …”

Decentralized Finance—A systematic literature review and research directions

“…While the so far discussed loan protocols enable short selling and leveraged long trading, the collateral impedes 'true' borrowing, i.e., entering a position of net debt (Gudgeon et al, 2020b) 3 . Moreover, locked collateral incurs opportunity costs, i.e., the inability to compile returns beyond price changes in the collateral itself (Harz et al, 2019;Kim, 2021). Hence, Harz et al (2019) present Balance, an incentive-based, dynamic collateral design which they show can reduce overcollateralization by 10% while maintaining the same level of utility and security.…”

“…Moreover, locked collateral incurs opportunity costs, i.e., the inability to compile returns beyond price changes in the collateral itself (Harz et al, 2019;Kim, 2021). Hence, Harz et al (2019) present Balance, an incentive-based, dynamic collateral design which they show can reduce overcollateralization by 10% while maintaining the same level of utility and security. Tien et al (2020) implement a solution in which capital locked in smart contracts is supplied to the liquidity pools of Compound, providing an historical average annual percentage yield of 4%.…”

Stablecoins 2.0

“…Exogenous collateral without governance assets (e.g. XCLAIM [39,83]) can be modelled using the capital structure models without considering the long-term impact of governance token value. Models that use exogenous collateral for the transferred asset in combination with endogenous collateral for incentives (e.g.…”