Is Uncompromised Security Possible in a Decentralized Future?

Dolomite , a decentralized money market protocol and the only lending and borrowing platform capable of supporting over 1,000 unique assets, announced the debut of $DOLO, its native token, which will be listed on Kraken and other leading exchanges. Users of Dolomite can leverage the potential of their dormant capital through smarter borrowing and lending, allowing for asset deployment via multiple DeFi integrations. Thanks to the platform’s advanced architecture, a single wallet can have separate borrow positions, each with a different risk profile.

Recipients will have half a year to claim their tokens after the airdrop, which allocated a fifth of the $DOLO supply to reward platform users and Minerals Program participants. 50% of the tokens will be available as liquid $DOLO, and the other half will be issued as a locked version of $DOLO, which will also come with protocol and governance benefits.

Another innovative feature of the Dolomite platform is Smart Debt, which allows traders to leverage users’ collateral or debt. For example, users supplying USDT can have it exchanged for USDC, enabling their collateral to serve as a liquidity pool for stablecoin traders. The trader takes out debt for the desired asset in their position and repays it in the asset they hold. Stablecoins serve many purposes, including as a unit of account, a medium of commerce, loan collateral, value store, etc. The main category, fiat-backed, is stablecoins pegged to fiat currencies like the US dollar.

DeFi, evolved: Ensuring freedom without sacrificing security

DeFi’s decentralization ethos remains difficult to reconcile with security concerns and risks. Since it relies on smart contracts and blockchain technology, it introduces challenges that users of TradFi services typically don’t face. DeFi projects and protocols are neither controlled nor overseen by central authorities or mediators, making risk management and mitigation more challenging. DeFi users are exposed to fraud, hacking, and volatility because DeFi often involves the usage of cryptocurrencies, which are subject to significant price swings.

Smart contract risks

Developers code smart contracts and deploy them in various blockchain platforms, but this process can involve errors or introduce exploitable vulnerabilities. They must be checked carefully prior to deployment on blockchain platforms, at which stage evaluating their correctness is crucial. The execution phase is also critical as it determines their final state. A trustworthy oracle is paramount because smart contracts cannot work without real-world data.

Dolomite’s infrastructure is built around a smart contract suite written in Solidity. Smart contracts are deployed to Arbitrum, the ultimate L2 blockchain solution enhancing Ethereum for public and transparent settlement. Solidity smart contracts are publicly auditable, meaning anyone can see and analyze the code and rules for the system at any time. Entities can analyze the state of any system using these smart contracts at any point to ensure it remains sound throughout its history.

In trading, position values are reflected in US dollars using prices written by Chainlink oracles on-chain. The oracles post new prices in a timely manner after each expiry window or whenever the price of a supported asset undergoes a slight deviation, rendering them consumable by the margin protocol. In deploying Dolomite to an L2 solution, Chainlink can post even timelier and more granular price data whenever the price of a cryptocurrency changes (compared to Ethereum). This further reduces the risk of a black swan event, likely to occur when an L1 solution becomes too congested to process price updates. The gravity of black swan events isn’t to be overlooked. They are rare but often unpredictable and lead to substantial economic damage.

Liquidity pool risks

Liquidity pools risk impermanent loss during extreme market fluctuations. Impermanent loss occurs when the fiat value of a user’s cryptocurrency deposited to a liquidity pool declines over time. Failure on the part of liquidity providers to comprehend the risks they are taking when contributing to automated market maker (AMM) pools incurs financial losses. Providers take on less risk by supporting asset pairs that trade within a range (for example, fiat-backed stablecoins), leveraging hedging strategies, or closely monitoring their positions.

Dolomite enables unobstructed and uninterrupted access to passive liquidity provisioning to minimize risks associated with poor liquidity. The platform liquidates accounts in line with best practices if the value of the user’s collateral drops below 115% of the cryptocurrency they have borrowed. Liquidations repay any debt by transferring an equivalent collateral amount from the borrower to the liquidator, plus a liquidation penalty. The minimum collateral requirement and liquidation penalty go down as Dolomite markets become more liquid.

Users who provide liquidity to AMM pools own them. The corresponding trades between the pool and the user are internal, which is why the pools don’t change the protocol’s aggregate balance. These AMM pools charge a fixed fee of 0.3% for executing trades against them, which goes to liquidity providers.

Governance risks

One final risk in DeFi relates to governance. Users may be unaware of the procedures and mechanisms applied to make decisions related to platform development and operation, including who is making the decisions and how. Paradoxically, a small number of individuals or entities can assume disproportionate control over DeFi governance, posing hazards for ordinary users, as these individuals’ or businesses’ decisions might not be in the community’s best interests. Over time, ownership of Dolomite will be transferred to an on-chain Decentralized Autonomous Organization (DAO) and distributed amongst many users and stakeholders, contributing to uncompromised security in a decentralized future.