Centralization Fails, The Necessity of Decentralized Finance
The security of digital assets came under the spotlight again as one well-known crypto exchange was unable to process users’ withdrawal demands due to poor management, internal errors and other reasons. In order to avoid centralized financial institution, bitcoin was designed as a peer to peer system at the beginning. Nevertheless, all current mainstream exchanges are centralized so that users’ asset loss happened repeatedly because of hacking, poor management and lack of transparency. Most cases ended up with users getting nothing back due to the particularity of digital assets and insufficient supervision. Using centralized financial institutions to manage digital assets means that the security of assets depends on ethics of exchange founders, promise of not doing evil from the team, and mercy from hackers. When can this situation be changed?
Facing various problems caused by centralized assets, we proposed MOV, a transparent and sound on-chain modern financial system. We hold a firm belief in the connection between blockchain and decentralized finance. We hope that MOV reflecting all leading blockchain technology could lead the way to explore decentralized finance. Neither a cross-chain technology nor an isolating trading system could simply disrupt the finance industry since they both have insurmountable boundaries. With a clear self-positioning, MOV focuses on two kinds of DeFi infrastructure, asset custody and asset circulation, from the bottom of blockchain and the beginning of ecosystem building. In MOV, realizing decentralized finance lies in sticking to transparency of assets and risk control, implementing prudent developing and testing, being equipped with decentralized federal gateway which has modern financial level security and risk control capabilities (Mature cryptography, Complete wallet security, Transparent gateway decision making mechanism). MOV’s asset circulating infrastructure such as DEX and stable financial system insist on on-chain principles so that sound risk control mechanism and stable solutions are guaranteed when confronting three types of risks: market risk outside the system, liquidity risk, and operating risk within the system.
Decentralized Federal Gateway Framework
Open Federation Management Framework ( OFMF) has only one goal: letting users give assets to your ecosystem with no worry (Principle 1). Based on that principle, gateway’s centralization is the first problem to solve and our fundamental approach is to open it （Element 1）. All ecological participants supporting a decentralized finance system(such as wallet, exchange, security facility, auditor, liquidity facility) should take control of the gateway’s decision making right, which means that all participants take control of the entire ecosystem. Blockchain is, in essence, a decentralized game system of rights and benefits, and this nature will be more mature and obvious with the development of blockchain. We should take advantage of this trend and set a collective management structure for MOV. This is our attitude and sincerity. This is also MOV’s basic law. Being open means accepting supervision and gaming, reflects courage and responsibility, lays the foundation for MOV.
Complete OFMF constructs feasibility from both mechanism and custody technology. In terms of custody technology, we attempt to make it perfect. We not only have mature multi-sign solution, but also develop a feasible limited party threshold signature solution that enables gateway custody to find a balance between security and flexibility, increases difficulty as well as cost for attacking. Threshold signature representing our mastering of advanced cryptography guarantees the security of gateway and ecosystem. MOV threshold signature is embedded in a reliable broadcast distributed gateway network, which is a semi-synchronous communication network based on safety and capable of defending against network systematic attacks. Therefore, the security of MOV signature custody mechanism is considered from the perspective of the fundamental system construction. It takes code auditing, mature engineering, and system network security into consideration. OFMF also plays the role of managing all of the financial input and output in MOV ecosystem. The risk control system is emphasized from the beginning of design: access restriction, 24-7 maintenance and monitoring, auditing, three-layer segregation, HSM module, internal risk control, etc. OFMF has not only all the risk control measures that centralized exchanges have, but asset transparency that centralized exchanges lack. Nevertheless, almost all current cross-chain projects overlook the integral construction because they regard it as a necessity for only centralized exchanges, and that’s why they have insurmountable boundaries when doing DeFi projects. Lessons have been taught that transparency and risk control cannot be neglected. Errors are made because basic principles are ignored. In the latest 100-million-BTM MOV fund plan, we allocate a significant amount of money on improving OFMF custody security and transparency mechanism. We hope that more institutions and experts could join us and make OFMF stronger.
MOV DEX and Stable Financial System
DEX is always compared with CEX and DEX has obvious advantages in equality and trading transparency. That’s what constantly pushes DEX to iterate and gradually has more advantages and less disadvantages over CEX. There is only one goal for MOV DEX: a public and fair trading market (Principle 2). Based on this principle, MOV DEX must be able to prove itself transparent at the first place: either common trading or professional quantitative trading, either ecosystem incentive giveaway or dividend distribution, is running on the blockchain. On-chain addresses are accounts (Element 2). It’s not necessary to worry about the performance bottleneck because the mainchain-sidechain structure solves the problem. With business and structure becoming more and more complicated, many projects make compromise, pursuing convenience at the expense of transparency, and this action lays hidden dangers for the future. Therefore, MOV DEX will not lose on-chain advantages on key procedures including price feeding. Most projects overlook this kind of seemingly insignificant auxiliary facilities and just cooperate with one institution. As a result, dependence on one single party and data error could bring structural damage to the system. MOV DEX emphasizes building a group of decentralized on-chain oracle but all these principles will not constrain MOV DEX’s user experience. In the following open testing, you will find quantitative trading on MOV smooth and interesting.
DEX should not be simply a replacement of centralized exchange ( we should avoid competition in the same dimensions). MOV provides incentives and gives back ecological surplus to every ordinary participant through market methods. This dividend distribution mechanism related to reputation must be built on a transparent asset circulation facility that follows market rules. So in the end, people will gradually find that they come to MOV because not only they want to exchange a BTC to a certain amount of stable coins but also they can do everything in the blockchain world here in MOV with a bitcoin. That’s the convenience and transparency that centralized exchanges lack.
At last, let’s talk about recently launched MOV stable financial system. We only have one goal: to make stable coins more stable and decentralized finance real financial system (Principle 3). Thus we redefine the stable coins representing current DeFi concept: to put stable coins as well as lending under the control of a stable system (Element 3). Recent coronavirus epidemic sheds light on two aspects, early warning system and social stabilization mechanism after the outbreak. It tells us that when black swan event occurs, those two mechanisms must not fail, otherwise stable coins are just a gaming Dapp with no responsibility. However, real financial industry is serious and risks cannot be neglected. In the past, practitioners were always battling with hackers on blockchain construction and smart contract. Now we should think more about a complete stable coin system and a complete lending market from financial perspective in the pursuit of decentralized finance. In the absence of warning system, risk control, transparency and stabilization, projects are not different from once popular Fomo3D even though contracts have hundreds of million assets in record. Modern finance will not accept an unstable thing as such a system has no capability to defend attacks even if collaterals are bitcoins. As a result, current stable coins are encountering resistance to break through its own lending boundaries and the root cause is that they are not prepared for the modern finance. On the one hand, they should prove themselves to the mainstream finance. They should perfect the on-chain stable system, which is more important than developing highly sophisticated function contracts and is a very important part of the entire product system. Therefore, from the beginning of designing MOV stable financial system, we are not launching a stable coin, rather, thinking about the true meaning and potential scenarios of stable coins driven by establishing a decentralized stable financial system. No matter the multiple collateral mechanism, the qualified collateral framework, the three-layer clearing system, the risk bond or the all-weather risk measurement system described in the white paper, they are all about the meaning and factors of a stable system. The product of a system could either be a stable coin or a comprehensive financial framework. Nevertheless, only when all risks involved in the scenario of decentralized finance are included in the model for the sake of flexible warning and prevention, are the entire system and the stable coins meaningful. Otherwise, it’s just a short-term speculation game, where stable coins are not stable, profit and risk control capability come from the volatile token price.
Surrounding the concrete scenario of stable coins, MOV stable financial system does much research and modeling. First of all, the multiple collateral framework. In the qualified asset selection, not only their cross-chain liquidation risks are considered, but also the assets’ correlation. Under the circumstance of common risk, the assets can run well independently. However, when there is extreme risk, correlation determines how much risk is further amplified and originally independent assets have to respond to the pressure placed on each other. The collapse of one asset could cause risk spread in the whole system. Clearing system is used for mitigating risks and a three-layer clearing system is built from the perspective of timeliness. Most of the time, risks are like flu, but in a few cases, risks are rampant like the epidemic. In the three-layer clearing system, the first layer deals with flu, the second layer plays a key role in isolation as a rapid buffer zone, the third layer usually will be triggered and take actions before the epidemic outbreak when the risk bond will be used. The risk bond is the last safeguard with humanity glory given to people. Of course, risk bonds are not groundless. Its trust value comes from long-term robust system performance and sustainable system returns and incentive feedback. In addition, monetary policy tools such as stabilization fee rates are also common stabilization approaches, especially in terms of system returns, stable coin prices, and supply stability. Those mechanisms can be concluded as common stabilization approaches but the most important things are early warning system and overall stable system (rather than partial stabilization). Therefore, in the white paper a lot of words are describing all-whether risk measurement system details. We think that all stable coin projects or DeFi projects should regard this new system as an essential part in project construction, not just establishing a nominal risk warning system.
All-weather Risk Measurement System has two parts, internal and external. One is a risk model outside the system making predictions about market extreme risks. After conducting a lot of research on models and methods, we selected several feasible approaches, such as volatility model, CVaR, correlation risk, Monte Carlo method, etc. We also build a warning mechanism that calculates everyday and updates every segment, in order to detect minor abnormity and give feedback to VaR model to make timely adjustments. The other is a stable model inside the system. For modeling this coronavirus epidemic spread, many classic random walk theories (such as the SEIR model) are widely used to predict the epidemic status. MOV also adopts classic Markov chain model to do predictions and modeling on actions inside the system. Each stable coin unit is created like a live entity of which status is influenced by complicated factors. Our risk control dives into every entity’s risk evaluation, explores various factors, finds a distribution path matching reality and finally forms real-time monitoring on key factors and systematic actions. It helps us understand the loss distribution of the system and instruct the system’s proper setting of monetary policy tools such as mortgage rates and stabilization fees. We integrate the two seemingly dependent models to enable mutual feedback adjustment on key system parameters and stabilization tools. For example, the extreme risk model (outside the system) could find a balance between system participation activity and mortgage rate settings so that a too high mortgage, which guarantees system stability but discourages system initiatives, can be avoided. In the meantime, this model is used for warning when black swan event occurs since the model will update with the latest market factors to improve its flexibility and timeliness. The other model (inside the system) establishes five balanced relationships: stabilization fee rate and system activity, mortgage rate and system activity, mortgage rate and loss distribution, fee rate and system income, system loss and system income. It gives feedback to and receives feedback from the model outside the system so that the key parameters are optimized and a complete risk measurement and a stable system are formed.
In the whitepaper, we emphasized repeatedly that “The model is only a tool for risk management. Excessive dependence will also bring certain model risks.”
“With the development of blockchain technology, application scenarios and supervision policies, the tail risk distribution of the crypto market is different and difficult to predict from year to year. Even the most sophisticated VaR risk models cannot work without professional manual fundamentals and trend analysis (Wise people are more likely to predict the happening of 2008 global financial crisis than mathematical model). As Alan Greenspan said, market risk quantitative tools, such as VaR, are instructive only if the calculation method of risk measurement and the relationship between risk measurement and actual performance are fully considered.” At last, we want to say that there is no complicated perfect models but establishing a sound risk control stable system is necessary. Only when the system is sound, can the function have a foundation, stable coins can be called stable, decentralized finance can be called finance, and then it can be safely applied in various scenarios. Otherwise, they are all fragile eggs under crisis. Not only can’t stand alone, they will also cause a chain of disastrous reactions.