Since the beginning of the year, we have been working on developing Pendulum, an open-source blockchain that aims to establish the missing link between the fiat and the DeFi ecosystems through a sophisticated smart contract network. Pendulum will be built with Substrate and will allow connecting DeFi to the foreign exchange market, building automated market makers (AMMs) to introduce scalable liquidity pools for fiat currencies, and create yield earning opportunities for fiat token holders.
Over the past two years, the Decentralized Finance (DeFi) ecosystem has grown exponentially and shows no signs of slowing down. There’s now a Total Value Locked of some $80 billion and a Cambrian explosion of innovative DeFi products — from decentralized investment protocols, prediction markets, and crypto lending to yield farming and liquidity pools for crowdsourced market making.
The DeFi ecosystem has created highly optimized markets for crypto assets, but not yet for a broad basket of high-quality fiat assets, which usually forces DeFi users to go through USD to participate in the DeFi activities instead of using their local currencies. Furthermore, compliant on-ramps and off-ramps into the traditional financial system are either inefficient or too complex for a smooth user experience. Existing financial markets, such as cross-border payments, savings accounts, lending, and foreign exchange are largely disconnected from blockchain networks and the fast-growing DeFi ecosystem, especially from new innovative protocols like Curve or Uniswap v3.0.
Given our role in the Stellar community, the Stellar ecosystem is an ideal breeding ground for connecting the existing financial system with DeFi: 15+ world currencies (and counting) are currently available as fiat tokens on Stellar via on/off-ramps compatible with traditional finance. Bridging Stellar to DeFi via Pendulum will essentially allow connecting the fiat banking system to DeFi products and services.
How Pendulum Works
Open source blockchain based on Substrate
Pendulum will be built on the open-source blockchain framework Substrate developed by Parity. Substrate is a battle-tested framework (most notably, Polkadot is based on it), which makes it easier for third-party developers to write their own apps and smart contracts on Pendulum. By building on a community-based framework, it also becomes easier to connect with other chains and protocols.
Bridges between Stellar, Ethereum, and Polkadot
The Pendulum-Stellar bridge will be a custom-built bridge service that operates through a decentralized network of bridge relayer nodes. These nodes monitor the networks, hold and release tokens, and mirror the assets between the Stellar and the Pendulum networks. The bridges to the Ethereum and Polkadot ecosystems will be based on third-party technologies.
Use Cases and Opportunities
Connecting the DeFi ecosystem with Stellar’s broad range of fiat tokens opens many opportunities for both DeFi products and traditional fiat infrastructures, as well as Stellar, Ethereum and Polkadot users.
Connecting foreign exchange market to DeFi
The foreign exchange market is the largest financial market in the world, with $6.6 trillion transaction volume per day. With Stellar’s 15+ fiat tokens and local integrations into the traditional banking infrastructure, Pendulum’s smart contract capabilities, and bridges to Ethereum and Polkadot, the DeFi ecosystem will have access to the immense forex liquidity.
Automated market makers (AMMs)
The strong demand for the Fiat-DeFi bridge is often combined with the need for automated market makers (AMMs) to introduce scalable liquidity pools for fiat currencies. As AMM smart contracts are deployed on Pendulum with quick and efficient exchange of fiat tokens, cross-border money transfers such as DTransfer will benefit from a fast, transparent, and cost-efficient currency exchange process.
Yield earning opportunities for fiat token holders
Fiat token holders will be able to put their funds to work on Pendulum, by depositing them into lending pools or by providing liquidity to AMMs.
Next Steps in Development
The Stellar Development Foundation recognizes the importance of interoperability and bridges between networks. SatoshiPay received a research and development grant from the SDF to develop the prototype of the Pendulum protocol. Our team is now close to completing the prototype with a Stellar-Pendulum bridge and support for AMM functionality.
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