The DeFi Engine and What It Means for the Future of Finance. | The Radix Blog | Radix DLT
April 11, 2022
One of the most important inventions in history was James Watt’s steam engine.
Watt, who was apparently inspired by seeing a boiling tea kettle, leveraged the original Newcomen steam engine design to create an efficient, flexible steam engine capable of massively accelerating an industrial revolution, by making the power of steam available to a much broader market of potential customers and for a broad set of applications and uses.
The industrial revolution changed the way that the whole world worked; the steam engine automated many of the processes that were earlier done by hand, and as a consequence, massively decreased production times.
Source: James Watt and the invention of the Steam Engine
The invention of different engines throughout history has had an outsized impact on societies and economies.
Engines take complex technologies that would otherwise be extremely difficult and risky to build into a product and make them safe, easy, and predictable. Engines dramatically alter the economics of an industry, by both dramatically expanding what is practical to build, and improving the quality of the results.
The Economics of Game Engines
Much more recently, we’ve seen the “engine-ification” of the game development industry.
Up through the 1990s, game development was slow and cumbersome. Game developers needed to start from scratch, writing complex code just to implement low-level functions like physics and graphics display before they could get to building the game itself.
The result was that games took a long time to develop, often required very specialized expertise, with clunky and unrealistic results.. If you are old enough to remember the early days of Atari, Coleco, Nintendo, and Commodore 64, you’ll understand.
Game engines changed everything for the industry; one of the first game engines to make a huge impact was the Unreal Engine, built by Tim Sweeney in 1998. The Unreal Engine accelerated and improved game development in much the same way that Watt’s steam engine accelerated and improved the development of machines that would revolutionize manufacturing, transportation, and more. (For a deep dive on game engines, see Game Engines: How do they work?).
Unlike general development frameworks…game engines are made specifically for creating games and have all of their components organized to do just that.
Since then, we’ve seen an explosion in the gaming market from $30 billion to nearly $200 billion, with no signs of slowing down.
Another industry turbocharged by engines.
The Birth of DeFi
Over the past few years, we’ve seen the growth of Decentralized Finance (“DeFi”) from $ 0 to nearly $200 billion (more or less, depending on the day).
That may seem like a lot (and it is remarkable growth), but it’s a drop in the bucket compared to the size of the global financial system at over $400 trillion. And that number doesn’t even include all of the metaverse value that is going to get created in the next few years.
Between the “real” finance system of $400 trillion and the coming Web3 economy (another $400 trillion or more?), we’re looking at what could be a $1 quadrillion global financial economy in the next decade or so. (I can barely take myself seriously when I write that, but that doesn’t mean it’s wrong).
All of that, and I do mean all of that, will rest on a DeFi infrastructure, because, well, software eats the world and DeFi is going to eat CeFi/TradFi. [I should put a snarky remark here like ‘if you don’t agree with that, just stop reading now and go read the Bitcoin whitepaper.”]
So, what’s stopping that from happening?
You guessed it, we need an engine.
How DeFi Works Today
DeFi today is like manufacturing before the steam engine and game development before the game engine. It’s complex, highly specialized, limited in what is possible, and prone to nasty errors. Any industry that has over $2 billion worth of hacks is clearly not ready for prime time.
A lot of this comes down to how the public networks that DeFi is built on force developers to build. It isn’t just the programming language (Solidity/Rust/Plutus/Scilla/Haskel etc) but the entire paradigm in which developers have to build.
It all comes down to a pretty mind-blowing statement: public networks like Ethereum, Solana, Avalanche, Near, Terra etc don’t inherently understand what assets are.
The superpower of decentralized ledger platforms is programmable digital assets. So if your platform doesn’t understand assets to begin with, that actually really sucks.
Here is an example to show what I mean.
This is how a DeFi decentralized exchange, like Uniswap, should work if the development paradigm were built around assets that work how we expect from the real world:
But this is how a decentralized exchange actually works on every single major public network where DeFi is built today in the Ethereum-style paradigm:
The reason is that Ethereum, and all Ethereum Virtual Machine-compatible platforms (plus platforms like Solana that have adopted a similar paradigm), are general-purpose and NOT asset-oriented.
Every single time a developer wants to create a new token s/he needs to start from scratch, redefining the concept of an “asset,” and a “token”, as well as keeping an internal balance of who owns what. Even if that is easy for some developers, the fact that having every token implemented independently creates a nightmare for apps that use tokens. Developers have to carefully connect to all of these token smart contracts, which may not behave as expected.
It’s like having to build your own physics model for a game before you can get started building the actual game. While some may enjoy this, most developers find it painful. We would know. Over the past 3 years, we’ve spoken with nearly 1,000 of them and this is a common theme. DeFi development is slow and inefficient, not to mention insecure.
In short, DeFi today is like game development before the Unreal Engine.
The “Engine Moment” for DeFi and the Finance Revolution
Watt’s steam engine accelerated the Industrial Revolution.
The Unreal Engine accelerated the gaming revolution.
The Radix Engine, the world’s first DeFi engine, is designed to accelerate the finance revolution.
The Radix Engine automates the functions associated with “assets,” “tokens,” and “transactions” and much more. It removes the cumbersome (and error-prone) elements of building DeFi, thus empowering the developers of the next wave of financial applications the ability to do more, faster, safer, and more easily.
“One thing that is often important to me when learning something new is the idea of applying the Pareto principle to what I’m learning. i.e., what is the most efficient way to get the most out of that amount of time and effort. Following this idea I can gain the most traction and momentum while learning something new in the shortest amount of time.”
As one Web3 developer wrote:
That’s what software engines do and it’s what a DeFi engine will do for DeFi.
So, how does the world’s first DeFi engine, the Radix Engine make DeFi development faster, safer, and easier?
How the Radix Engine Works
First of all, the Radix Engine adds the asset-oriented foundation that DeFi dApps need. By actually understanding what assets are and guaranteeing they behave the way we naturally expect, there’s no longer a need for developers to create their own ledgers of token balances within smart contracts on a ledger (yeah, it’s confusing). And more importantly, developers of dApps that use tokens don’t have to worry about whether each of 1000 independent ledgers are doing the right thing.
How, you ask? Radix Engine’s philosophy is based on how assets “physically” behave in the real world — whether we’re talking about cash, art, movie tickets, your driver’s license, or a loan contract. It turns out that there are only so many things that it makes sense for an asset to do: Somebody (or something) has to hold them. They can change hands. They never suddenly disappear or multiply when you’re looking the other way (only when there is a reason for them to be created or destroyed). And sometimes there are special rules about who (or what) has the right to do those things with that particular asset.
Radix Engine encodes those physical behaviors, and the ability to customize who/what can use them, as a “finite state machine” (or FSM). This is just a fancy term for a system where you prevent errors by only allowing the things you want to be possible. You know, like in a nuclear power plant where you want to know for sure that no combination of the settings on the knobs and switches can ever put the plant in a state where you have a meltdown.
The Radix Engine also can run whatever logic a developer can dream of (it’s “ Turing complete “ in the jargon) — but the asset FSM means that the developer can rely on assets rather than be afraid of doing something wrong when touching them.
The Radix Engine, as one of our community devs said, “has your back”
The asset toolbox in the Radix Engine means that we can create a smart contract language that exposes all of that power, called Scrypto. It uses Rust as a basis, so it has all of Rust’s power and flexibility, but adds native concepts for assets (we call them “resources”), asset containers (vaults and buckets), asset functions (take, put, mint, burn), and more. This means that creating and using tokens, NFTs, and any other kind of asset is easy and safe — and writing cool applications with assets is worry-free and results in simpler, better code.
The Radix Engine even changes how transactions work to be asset-oriented. Each transaction directly describes how assets should move between accounts and smart contracts (we call them components). Composability — the ability to connect smart contracts together to do even more powerful stuff — becomes just a set of simple transaction instructions rather than needing a whole new smart contract.
The promise of decentralized ledgers is about liberating people and their assets from the need for trusted intermediaries who impose constraints, fees, and oftentimes arbitrary rules on the wealth of others. The innovation of DeFi, like steam and gaming before it, is here. The builders of tomorrow, who will help make Traditional Finance obsolete, are today working with one hand tied behind their backs.
We’re on a mission to give builders everything they need to obsolete $400 trillion of Traditional Finance. The Radix Engine, the world’s first DeFi engine, is one of those capabilities.
The Engine Legacy
In 20 years, there will be many DeFi engines and the invention will seem obvious in hindsight, just like Watt’s and Sweeney’s now do. They will power our daily lives and they will be invisible to most people.
But their impact will be massive.
And for those who understand this today, the opportunities are equally massive.
Ready to learn more about the Radix Engine
For today, however, there’s only Radix.
Chief Marketing Officer — RDX Works Ltd
Originally published at https://www.radixdlt.com.