Understanding Chainlink Proof-Of-Reserve - The Decentralized Oracle Network
This article will help you understand why Chainlink Proof of Reserve is so necessary in the DeFi world.
This article will help you understand why Chainlink Proof of Reserve, a powerful tool for auditing cross-chain and off-chain information, is so necessary in the DeFi world as well as how it works and applications. importance of this tool.
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Why Chainlink Proof Of Reserve is needed?
- The traditional market carries the potential risk of dubious loans and accepts collateral that is smaller than the loan.
- Decentralized finance (DeFi) is a more transparent alternative to smart contracts that require a collateral higher than the loan value. However, the development of DeFi requires new types of collateral for both blockchain-specific assets and cross-chain tokens, fiat-pegged stablecoins, and tokenized real assets.
And that solution is Chainlink Proof Of Reserve.
Learn more about Chainlink and similar projects:
What is Chainlink Proof of Reserve?
- Chainlink Proof of Reserve is a reference data feed on the blockchain that will provide the data needed for a smart contract to calculate the collateral of any on-chain asset, which is collateralized. by an off-chain reserve.
- How it works: Chainlink Proof of Reserve is operated by a decentralized oracle network that allows automatic off-chain collateral audits to protect user assets from partial or fraudulent reserve practices. fraud from off-chain financial supervisors.
- Enhance transparency when collateralizing assets in DeFi.
- Increase confidence in financial products by showing users clear proof of ownership of their assets.
Applications that show the importance of Chainlink
1. Validate collateral reserves for Bitcoins and encrypted cross-chain assets
The problem posed:
- Demand for cross-chain mortgages increases.
- Since cross-chain tokens are representative of cryptocurrencies held by off-chain custodians, the smart contracts of the token receiving chain are not capable of determining the actual collateral behind the cross-chain token. there.
- The Proof of Reserve feeds are powered by a network of oracles, allowing Chainlink to check the BTC balance of the custodian address on the Bitcoin blockchain.
- Every 10 minutes, the Chainlink Proof Of Reserve reference feed provides data to audit WBTC (BitGo) and RenBTC (Ren Protocol) reserves for DeFi applications when deviations above a defined threshold are detected. from a previous balance being stored on-chain, the on-chain Proof of Reserve reference feed is updated with the new balance data.
- DeFi applications using smart contracts can customize their computer logic to proactively protect user assets when any collateral is smaller than the amount of Bitcoin needed to collateralize the tokens. cross-chain transactions.
- Paving the way for new financial products such as Credit Default Swaps (Credit Default Swaps - Financial arrangements that allow lenders to hedge against default or underpayment from borrowers), helps protect lenders against partial reserve operations and predictions that affect the value of tokenized Bitcoins.
- Expand the economic performance of crypto-Bitcoins and cross-chain tokens in the DeFi market when their transparency and security are guaranteed.
- Provides collateral data for any cross-chain asset traded on any smart contract-enabled blockchain (e.g. ETH encrypted on Polkadot, XTZ encrypted on Cosmos, etc.). Thereby accelerating DeFi growth and creating new cross-chain diversification opportunities.
2. Validate the value of off-chain reserves of pegged stablecoins with fiat
Stablecoins are a very important collateral:
- Provides the ability to trade and make profits on a currency of stable value.
- Bring the non-custodial and permissionless nature of smart contracts.
- Generate the highest yield in DeFi.
- Provide proof to smart contracts that each stablecoin is fully backed by an equivalent dollar amount in an off-chain escrow bank account.
As such, stablecoins have become a popular collateral choice and the basis for expanding the adoption of DeFi financial products.
Reference: What is stablecoin? How many types of Stablecoins are there?
- Chainlink Proof of Reserve provides smart contract applications with collateral data regarding off-chain reserves of fiat-pegged stablecoins from trusted and professional auditors.
For example, TUSD 's Proof of Reserve and Proof of Supply reference feeds provide DeFi applications with proof of the amount of US dollars held in TrustToken's escrow bank account and the number of tokens. TUSD is issued on other blockchains.
The Proof of Reserve reference feed for TUSD is derived from data from Armanino (the top 25 US accounting firms) that conduct regular reviews of TrustToken fiduciary bank accounts.
The TUSD Proof of Reserve feed works independently of the TrustToken, providing neutral data and increasing confidence in the data provided.
- Monitor the collateralization of any stablecoin backed by off-chain fiat reserves.
- Increased adoption of stablecoins in DeFi from retail users and traditional institutions looking to reliably and securely profit.
- Provide collateral data related to any fixed asset like (GBP, gold,..) to increase the transparency of the entire portfolio in DeFi.
3. Integrate proof of reserve into the traditional market
The Chainlink Proof of Reserve model has broader applicability to bring transparency to any asset that has been tokenized and put on the chain.
- Use for encrypted real-world assets. Example: Real estate asset cash flow verification.
- DeFi space applications and smart contract applications.
Example: Using blockchain technology without any modification to the user's business model or enterprise system, organizations provide a reliable and immutable source of data on assets from that creates the highest level of transparency.
- Allows users to hedge against traditional off-chain organizations' fractional reserve operations.
Chainlink Proof of Reserves:
- Provides data for both the DeFi ecosystem and the traditional financial system.
- Enhance the transparency of property mortgages.
- Bring trust to the financial industry with Chainlink's smart contract transparency and highly accurate information source.
It can be said that Chainlink is building trust, transparency and laying the foundation for the expansion of De-Fi adoption as well as subsequent financial products.
You can read more about the original article here .
Source: Chainlink Blog
Oct 14, 2022