Improve DeFi Collateral Transparency with Chainlink Proof-of-Reserve Oracles

For centuries, the role of financial markets has been to maximize the value created by human society. However, todays global financial system generally suffers from insufficient mortgage ratios and insufficient transparency, which leads to frequent occurrence of systemic risks and eventually causes the collapse of the entire financial market. The innovation of decentralized finance is that it uses smart contract technology to create highly transparent financial products, and adopts an over-collateralized model to provide excellent security. With the continuous development of DeFi, the market demand for new types of collateral is increasing, not only the traditional on-chain native tokens, but also cross-chain tokens, stablecoins anchored to fiat currency, and tokenized off-chain assets etc.

In order to ensure the end-to-end transparency of the DeFi ecosystem, we have developed the Chainlink Reserve Proof, which is a reference data on the chain, which provides the required data for smart contracts and calculates the real collateral status of the off-chain reserves corresponding to any assets on the chain .Chainlink’s Proof of Reserves is run by a decentralized oracle network, which can automatically conduct real-time audits of collateral in DeFi applications to ensure the security of users’ funds and prevent insufficient reserves or off-chain custodian fraud.

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Currently over $2 billion worth of tokenized Bitcoin is bridged to the Ethereum blockchain. The demand for cross-chain tokens in the DeFi ecosystem continues to grow, so the proportion of tokens used as collateral in DeFi has also increased. However, since the encrypted currency collateral of the cross-chain token is hosted by the off-chain custodian, and the smart contract on the chain cannot verify the real mortgage rate of the cross-chain token, it has a high risk.

To solve this problem, Chainlink has introduced Proof of Reserve reference data, inputting required data for DeFi applications, auditing BitGo’s WBTC and Ren Protocol’s renBTC reserves. These two tokens account for 90% of the wrapped Bitcoins on the Ethereum blockchain. Proof of Reserve data is transmitted by the Chainlink oracle network, which checks every ten minutes for bitcoin balances in escrow addresses on the bitcoin blockchain. Whenever there is a deviation from the last balance stored on the chain, and the deviation exceeds a certain range, the reference data of the reserve certificate on the chain will be updated to reflect the real balance.

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Chainlink’s Proof-of-Reserve Proves BitGo WBTC’s Bitcoin Collateral Amount to Smart Contracts

Bitcoin proof-of-reserve reference data will enable a whole new range of financial products, such as credit default swaps. Users can hedge the risk of insufficient collateralization ratio, or speculate on the collateralization ratio of a certain tokenized Bitcoin. Hedging the risk of tokenizing Bitcoin in DeFi applications can further enhance security and transparency, and thus activate the DeFi economy.

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Stablecoins are a vital part of the DeFi ecosystem. Users can use stable currencies to trade and generate income. In addition, they can retain the key attributes of blockchain smart contracts that are permissionless and anti-censorship. In particular, it should be pointed out that the average rate of return of stablecoins is the highest in DeFi, so more and more people use stablecoins as collateral. This fundamentally promotes the application and development of DeFi financial products. There are more than 20 billion US dollars worth of stablecoins on the Ethereum blockchain alone, so it is necessary to provide objective and authoritative proof for smart contracts, proving that each stablecoin has an equal amount of US dollars as collateral in an off-chain custodian bank.

Chainlink Proof of Reserves obtains data from professional and credible audit firms, and transmits collateral data of stablecoin off-chain reserves to smart contracts. The most typical case is to use TUSD reserve proof and supply proof to prove to DeFi applications the US dollar reserves in the TrustToken custody bank account and the number of TUSD tokens issued on each blockchain.

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Chainlink’s Proof-of-Reserve Proves to Smart Contracts the Amount of Dollars Collateralized for TrustToken’s TUSD Stablecoin

The TUSD reserve certificate is independent of TrustToken, so the data is more independent and more reliable. In this mode, Proof of Reserves can be deployed to track the off-chain fiat reserve rate of any stablecoin. This mechanism not only increases the activity of DeFi retail users, but also attracts traditional financial institutions to participate and obtain benefits safely and securely.

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The current Chainlink reserve proof mechanism can only prove the mortgage status of existing tokens in the DeFi ecosystem. In fact, the ultimate goal of this mechanism is to cover all types of tokenized assets on the chain. Tokenized assets often require extreme trust in the issuer, which is almost impossible to achieve. But now with Proof-of-Reserve mechanisms, transparency can be achieved and applications scaled.

Chainlink proof of reserves can provide proof for a series of tokenized off-chain assets such as real estate, and verify the income generated by off-chain assets. The proof of reserves can check the property ownership and the bank account that hosts the dollar income, and transmit the data to the chain, so that the smart contract can create a trustless certificate based on the real estate and its income, and the mortgage rate of the certificate is decentralized by Chainlink network of oracle machines for verification.

Summarize

Chainlink Proof of Reserves can enhance the transparency of the DeFi ecosystem and the traditional financial system, provide real proof of collateral for any asset on the chain, and solve the general problem of lack of transparency and trust in the industry. With the continuous development of the smart contract ecology, it is necessary to achieve end-to-end trust and security, and there must be no gaps in the middle, so as to completely eliminate a series of problems caused by the opaque collateral. Chainlink Proof of Reserves will further push the DeFi ecosystem forward and ensure the security of the next generation of financial products.

If you are a developer looking to integrate Chainlink Proof of Reserves into your smart contract application, please check out our developer documentation or contact us here.