Enveloping for Zero-Fee Transactions: Boosting DeFi Adoption
Traditional finance is essentially flawed, with centralized control of systems plagued by efficiency-curtailing intermediaries. Despite enhancements in usability and user experience, primarily backed by innovations in Fintech, centralized finance evokes persistent privacy concerns. On one hand, users have little or no control over their financial data. On the other, such data is stored in centrally-located servers, which represent identifiable points-of-failure.
Over time, censorship, espionage and security breaches have emerged as the major pain-points in global finance. Restricting double-spending and other malpractices—as facilitators, record keepers, and overseers—has been the primary function of financial intermediaries, such as banks and brokers, among others. Naturally, such entities exert immense control over financial processes, which is often against the end-user’s interests.
In 2008, Bitcoin’s release marked the first stable implementation of decentralized, peer-to-peer money, thereby introducing a viable alternative. Replacing the ‘trusted intermediaries’, it adopted blockchain technology, cryptography and algorithms. Instead of a centralized authority, the trustless network relied upon distributed community governance. Akin to the Copernican Revolution in natural science, Bitcoin implied and initiated revolutionary possibilities in finance.
Presently, Decentralized Finance or DeFi is among the most popular buzzwords of the blockchain-cryptocurrency domain. However, while innovations are on the rise, backed by investments worth billions of dollars, scalability and high transaction fees have significantly hindered mainstream adoption.
In this article, we discuss these aspects of the DeFi revolution in-depth, while highlighting RSK’s enveloping solution for no-fee transactions.
Index
The Problem of Rising Fees
Security & Decentralization: The Stakes of Scalability
RIF Enveloping: RSK’s Innovations in Meta-Transactions
Beexo Wallet Integration for Zero-Fee RSK Transactions
The Future of DeFi
The Problem of Rising Fees
To fully grasp the significance of enveloping and zero-fee transactions, we must begin by tracing the problem. In doing so, it’s necessary to briefly discuss the history of Decentralized Finance (DeFi). However, the impossibility of assigning a particular moment in time as the genesis point of DeFi is also notable. DeFi, as we know it today, has evolved over the past decade or so, driven by a multiplicity of factors. Having already discussed the socio-technical factors in our in-depth guide to DeFi, we shall focus on two specific aspects in this article: scalability and fees.
In its broad sense, DeFi covers a plethora of processes and solutions that facilitate open financial systems. It isn’t merely this or that particular solution, but a holistic paradigm leveraging blockchain technology, cryptography, peer-to-peer (P2P) networks, etc. Indeed, DeFi is a financial revolution and by conceiving Bitcoin, Satoshi Nakamoto sowed the seeds that we presently reap. Leveraging crypto-primitives and distributed ledger, Bitcoin offered a viable means of recreating the instruments of traditional finance. In turn, this paved the way for an open, permissionless, secure and community-governed monetary framework. Beyond this point, however, the limited functionality of Bitcoin’s core rendered it incapable of accommodating necessary processes such as borrowing, lending, derivatives, etc. and that’s where RSK comes into the spotlight.
Ethereum, through the Ethereum Virtual Machine (EVM) facilitates the development and deployment of Decentralized Applications (dApps). In general, Smart Contracts comprise the pivotal element of dApps, while their scope touches almost every organizational and social domain. Backed by these factors, among others, Ethereum has emerged as the primary breeding ground for innovations in DeFi.
Despite their contributions, however, both Ethereum and Bitcoin come with certain inherent trade-offs that hinder the mainstream adoption of DeFi. Although the problems aren’t exclusive to these ecosystems, we shall focus on these two for the sake of compactness and clarity.
Ethereum’s client-to-contract model and Bitcoin’s Proof-of-Work (PoW) consensus mechanism pose a serious challenge to scalability. To acquire self-sustainability, both platforms require users to pay a fee for transactions, which have risen parabolically in proportion to the networks’ traffic. As more people use the network, especially in Ethereum’s case, there’s greater congestion, which inadvertently translates to exorbitant transaction fees.
Naturally, this has been very off-putting for small, medium and possible new users of decentralized applications and services. Previously, in 2020, the community witnessed over a 2000% surge in BTC’s transaction fees. In 2017, when Cryptokitties accounted for over 25% of Ethereum’s traffic, the gas fee had risen to 25 GWEI. Moreover, certain in-game contracts demanded 250,000 gas for processing. In all, these metrics show that the problem is more historical than contemporary, meaning that it’s also structural. In other words, the problem of the rising fee is a general one and not specifically dependant upon particular applications.
Security & Decentralization: The Stakes of Scalability
Considering the foregoing discussion, one might intuit that resolving the scalability issues will resolve the fee crisis. To an extent, the judgment is infallible, but a closer look reveals subsidiary and more subtle concerns. Bitcoin, for one, holds on to the PoW consensus for fundamental reasons—security and decentralization—meaning that its scalability shortcomings are matters of necessity.
Alternatives to PoW have been suggested and developed, but their efficiency with regard to network security is yet to be fully ascertained. For instance, Ethereum is planning to implement Proof-of-Stake (PoS) consensus in its 2.0 version. Nevertheless, both theoretically and in terms of available know-how, PoW ensures the greatest degree of network security.
Alongside the security aspect, there’s decentralization, followed by trustlessness. To be optimally decentralized, a network must preclude the possibility of being controlled by singular entities. Moreover, trust-points need to be minimized, if not completely eliminated. Although resource-intensive, Bitcoin’s PoW stands up to this challenge by enabling fully-decentralized consensus through a globally-distributed set of miners. In turn, the mining process is algorithmically controlled, meaning that it’s optimally trustless as well.
On the other hand, PoS-based consensus is also achieved through random and globally-distributed validators. However, in logical terms, the need to trust these entities remains, which translates into the risks of manipulation and censorship though penalizations exist in the form of losing staked tokens.
In the present context, we can safely vouch for Bitcoin’s robustness which is time-tested and well established. Leveraging two-way pegs, Bitcoin sidechains like RSK represent a feasible solution for its inherent lack of scalability. In simple terms, they tap into Bitcoin’s deep security and decentralization, while expanding the functionality using smart contracts.
RSK’s ecosystem, for one, has several Bitcoin-backed DeFi offerings, such as RIF on Chain (RoC), RSK Swap, etc. In this regard, the greatest contribution of this sidechain ecosystem is that it combines the best of Ethereum’s computability with Bitcoin’s security and decentralization. Through this route, Bitcoin officially enters DeFi, thereby substantially strengthening this innovative domain. However, despite all, the previously-discussed problem of transaction fees remains, which we address in the next section.
RIF Enveloping: RSK’s Innovations in Meta-Transactions
The problem of high fees inadvertently implies usability shortcomings for DeFi solutions, thereby hindering their uptake for mass usage. In general, transaction fees are payable using the concerned platform’s native token—ETH in the case of Ethereum, RBTC in the case of RSK, and so on. Thus, to interact with these networks, users have to first acquire these tokens, which is a significant barrier to their entry into this space. Meta-Transactions, better known as Enveloping, is a possible way to mitigate both the fee and usability aspects.
The rising popularity of fiat-collateralized stable assets has been a corollary of DeFi’s evolution. Individuals often tend to use these tokens for savings and as stores of value, apart from conducting ordinary blockchain-based transactions. As such, meta-transactions enable this functionality and are so named because they are embedded into meta (higher) level transactions.
The primary use-case of meta-transactions is that users can pay transaction fees using tokens, rather than the platform’s native crypto. Developers can also employ this method to subsidize the associated gas fee for accessing smart contracts. Relayers are crucial to this process, as they perform the role of decentralized and trust-minimized bridges. They execute the user’s transaction, in return for tokens. The internal transaction between the Sender and the Relayer is atomic, which ensures that either both or none of the ends are upheld. In turn, this ensures that neither of the counterparties is deprived of their due, thereby minimizing the degree of trust involved.
Beexo Wallet Integration for Zero-Fee RSK Transactions
Enhancing the user experience of DeFi solutions is one of the primary goals of the RSK community. In doing so, eliminating transaction fees is a major step, as outlined in the previous sections. In collaboration with Beexo Technologies—a leading wallet services provider for the RSK ecosystem—IOVlabs has developed a robust Enveloping System.
Starting off the journey with Beexo Wallet, the RIF Enveloping solution will enable wallet providers to fully or partially sponsor the users’ transaction fees. Alternatively, third parties can ask to be remunerated in tokens, which also minimizes the end-user costs.
Unlike existing enveloping solutions, especially those related to Ethereum, the Beexo Wallet integration works with already-deployed smart contracts and doesn’t require their redeployment. Consequently, the cost of sponsored transactions is slashed almost by half, thereby enabling developers to provide greater subsidies to dApp users. As a whole, this will allow members of the RSK community to transact at zero-cost, and in turn, incentivize greater DeFi adoptions. That too, while ensuring that the developers’ community also isn’t at a loss.
For a deeper technical understanding of RIF Enveloping, readers are directed to the relevant section under RSK’s documentation. Armored with these detailed expositions and the open-source codebase, developers can build custom enveloping solutions on RSK.
The Future of DeFi
Financial inclusion, in our view, should be considered as a basic human right, especially in the context of our money-driven society. As the perils of centralized finance aggravate and increasingly appear on the forefront, DeFi systems are constantly gaining greater significance. However, as hitherto discussed, the problems of scalability, usability and transactional costs obstruct the achievement of DeFi’s fullest potential.
Realizing the immense need to provide alternatives, the RSK community has been striving to create intuitive elements that can serve as the foundation for a fully-decentralized Internet of Value or Web3.0. This calls for holistic change across multiple dimensions, of which DeFi is one of the most crucial.
In light of recent innovations in cost-minimizing and usability-enhancing solutions such as meta-transactions, obstacles to adoption are being rapidly overcome. The future of DeFi, thus, shines brighter than it already did in the recent past. As it is, RSK’s sidechain architecture imparts optimum scalability and wider functionality to Bitcoin’s core. Now, by reducing the cost of transactions, RIF Enveloping marks yet another forward-step towards the end goal.
In combination with other ‘DeFi for Bitcoin’ solutions on RSK—such as RoC, MoC and RSK Swap—RIF Enveloping is a pivotal element for greater financial inclusion. Furthermore, the existence of RSK-powered, non-custodial, permissionless and decentralized trading platforms such as Sovryn, also assures the availability of liquid secondary markets for assets deployed on this network. In all, we are steadily treading towards a world where users are in complete control of their financial assets and identity.