Pendulum: The missing link between Fiat and DeFi
It is not a secret that existing markets are literally overloaded with money. Traditional financial tools such as forex, saving accounts, lending, or foreign exchange trades are largely disconnected either from blockchain networks or the fast-growing innovative DeFi ecosystem. Not to mention the inefficiency of traditional financial tools and their inability to provide a smooth user experience.
However, there is a solution that could be the missing link between fiat and DeFi. A fiat-optimized smart contract blockchain based on Polkadot’s Substrate. This solution is called Pendulum and its mission is to allow traditional finance fiat services to integrate with DeFi applications such as specialized forex AMMs, lending protocols, or yield farming opportunities. Pendulum’s sister network Amplitude aims to launch on Kusama in July — the waitlist for the crowdloan offering bonuses in $AMPE is already available.
The beginning
The idea of Pendulum emerged in early 2021 when SatoshiPay’s tech team was looking for opportunities to connect its cross-border payment service DTransfer to an automated market maker (AMM) that would allow fast, transparent, and cost-efficient currency exchange based on the broad stablecoin ecosystem of Stellar.
The Pendulum-Stellar bridge, Spacewalk, will be a custom-built bridge service that operates through a decentralized network of bridge relayer nodes. These nodes monitor both 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.
According to the Pendulum project, foreign exchange has a transaction volume of $6.6 trillion every day. This is an enormous market and opportunity for Pendulum to become a game-changer. 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 in the potential next bull market.
Pendulum chain aims to become the one-stop hub for the internet of fiat with benefits including:
- Cross-chain trust-minimized bridges make a broad basket of fiat-pegged stable tokens available
- Next-generation smart contract technology
- An institution-grade compliance layer with privacy features
- Seamless on/off-ramps for integrations into the local banking network
Spacewalk: The trust-minimized bridge between Stellar and Polkadot
Spacewalk aims to utilize the multitude of fiat-stable tokens on the Stellar blockchain and help build the fiat DeFi future on top of the Pendulum chain. Spacewalk introduces the way of flowing stable tokens from the Stellar network as it is the first bridge between the Stellar network and the Polkadot/Kusama ecosystems. Based on XCLAIM and interBTC, it is implemented as a Substrate pallet and allows any Substrate-based blockchain to use a direct Stellar bridge. Pendulum has received a grant from the Web3 Foundation for developing Spacewalk and has already delivered the first milestone.
How Spacewalk bridge works
Let’s take a closer look at the functionalities of the Spacewalk bridge. For simplicity, we will address Spacewalk as the “Spacewalk chain”. The whole process starts with tokens that will be temporarily locked inside Stellar and respective “wrapped tokens” minted 1:1 in the Spacewalk chain. This wrapped asset is supposed to be cryptocurrency-backed. The picture below will provide information on the process of issuing and redeeming tokens
The entire operation is split into two processes:
Issue:
- Step 1: The user sends tokens from their Stellar account to a dedicated locking account which makes them temporarily unusable in the Stellar network
- Step 2: Immediately after step 1 the Spacewalk pallet will mint wrapped tokens and send them to the user’s account inside the Spacewalk chain
Redeem:
- Step 1: The user burns wrapped tokens in the Spacewalk chain via the Spacewalk pallet
- Step 2: Shortly after tokens will be unlocked inside Stellar and sent back to the user’s account
The Stellar locking account could be owned by single or multiple owners control. Owners of course need to be trusted not to attempt a Sybil attack. A Sybil attack, just like the recent Axie Infinity Ronin hack, is a situation when an attacker controls the majority of account owners and tries to use tokens for their own purposes. In other words, he defrauds the tokens. There are many ways to ensure security, although in this case, it appears that maximizing independent account owners will do the job. Spacewalk also enhances the security of Stellar locking accounts by adopting a similar approach to InterBTC.
There is however another challenge that exists — the “oracle problem”. Whereby the Spacewalk pallet needs to have correct information about transactions on Stellar so it can reliably mint wrapped tokens after the user locks tokens. We’ll dive into the Stellar Oracle solution later too.
Spacewalk adopts InterBTC’s vaults solution
Spacewalk originates from InterBTC. The main difference lies in replacing Bitcoin components with Stellar-based components. In a nutshell, InterBTC is a Polkadot parachain Bitcoin bridge that uses over-collateralized vaults to achieve decentralization not by decentralizing the owners of the locking account, but by decentralizing the locking account itself. Here’s how it works.
Decentralization:
- everyone is free to create their own vault (and become an owner of that vault) in a permissionless manner
- this way the set of vaults can dynamically change and grow
- any user who wants to issue wrapped tokens can freely pick any vault to lock their Bitcoin
Collateralization:
- any vault owner needs to lock collateral on the Interlay blockchain via the InterBTC pallet with the asset usually being DOT
- this collateral needs to be locked as long as the vault exists
- the value of the collateral should be 150% of the value of the Bitcoins locked in the vault (overcollateralized) — InterBTC uses a price oracle to compare Bitcoin and DOT prices
- if a vault owner misbehaves, then (parts of) their collateral will be slashed and any user who was affected negatively will be refunded through the collateral (collateral value being higher than the locked Bitcoin value ensures full refunds for users even if the vault owner spends all locked tokens)
There are however some key differences between Bitcoin and Stellar including:
- Stellar supports a wide variety of assets and every Stellar user can freely create their own custom assets
- Stellar does not employ Nakamoto consensus but a custom consensus algorithm called Stellar Consensus Protocol. For that reason, it is not possible to infer merely from sequences of block headers which sequence is valid — for Nakamoto consensus, this is simply the sequence with the highest amount of work. On Stellar, block headers must be signed by a quorum of trusted validators to be considered valid.
The Spacewalk vaults solution with multiple assets
Every vault on Spacewalk will be able to support multiple assets. For that purpose, it uses a Stellar feature called trustlines. By setting up trustlines for specific assets on the vault account in Stellar, it can control what assets it supports for bridging. When bridging, the user additionally specifies what asset they intend to issue or redeem. With multiple assets, calculating the collateral value of each vault becomes more complex so the protocol needs to use a price feed oracle. Additionally, it requires another oracle in order to solve the aforementioned oracle problem. Enter Stellar Oracle.
Stellar Oracle
The Stellar Oracle is decentralized and by design at least as secure as the Stellar network itself. It uses special properties of the Stellar Consensus Protocol, a special-purpose consensus algorithm used in Stellar. Stellar is a decentralized system of nodes that is organized into tiers with the most significant tier being Tier 1. Every 5 seconds the nodes in a Stellar network vote on finalizing a new block. The Tier 1 nodes predefine a fixed set of quorums, where a quorum is a subset of Tier 1 nodes. The quorums are defined in such a way that between two different quorums there is always at least one Tier 1 node that is in both quorums. Learn more about this process here.
The Spacewalk pallet stores information about the set of Tier 1 Stellar nodes, their public keys (used to validate signed externalized messages sent by them), and all Tier 1 quorums. The Stellar oracle will forward signed externalized messages from all Tier 1 nodes to the Spacewalk pallet. The Spacewalk pallet will validate the signatures and can conclude that a specific block is final whenever it identifies that any Tier 1 quorum voted on that block. The set of Tier 1 nodes, their quorums, and their signing keypairs are dynamic and can change over time (rarely about one change per year) and Spacewalk uses a governance mechanism to keep in sync with these changes.
Three milestones for developing Spacewalk
Milestone 1: Definition of the fundamental structure of the project
- The Spacewalk code repository will consist of the Spacewalk pallet, some off-chain clients to operate vaults and oracles, and a Substrate standalone chain that implements the Spacewalk pallet that is used for testing purposes
- Integration of multi-asset support: vaults will support multiple assets and a user can issue and redeem different kinds of Stellar assets
Milestone 2: Implementation of the collateral managing system for multiple Stellar assets
- Usage of a price feed oracle for all assets supported by the vault
- Determination of the total combined value of all tokens locked in the vault account and comparison of the value of the collateral
Milestone 3: Implementation of the Stellar oracle and all its components
- Adding a mechanism to store and maintain the current configuration of the Tier 1 network, including its public signing keys and the set of Tier 1 quorums
Amplitude: the canary network
Similar to other networks on Polkadot, also Pendulum has its own canary network. It's called Amplitude and it serves as the testing space for Pendulum tech.
Amplitude has its own parachain slot on Kusama.
What’s next? Pendulum crowdloan!
The waitlist for the Pendulum crowdloan is already available now and offers 5% bonuses in PEN for waitlist participants.
If you wanna learn more, check the Pendulum website or presentation at AmsterDot, where Polkadotters also participated.
We will be pleased if you will use our referral link for the Pendulum crowdloan https://pendulumchain.org/crowdloan/waitlist?r=fXlR7
Summary
Given that Pendulum is constantly working on new partnerships across the crypto and legacy finance industries with fiat-stable token providers, blockchains, bridges, and large fintech businesses, VCs will be invaluable in making new fruitful introductions from their expansive networks.
Forming partnerships with important industry players is becoming a habit, particularly after Pendulum was successfully chosen for the 2022 cohort of the Berkeley Xcelerator program and the Web3 Foundation grant program and is working on creating its own ecosystem grants program.
By following the roadmap step by step by step, the launch of Pendulum’s mainnet on the Polkadot network and the launch of the Spacewalk bridge can be delivered in Q1 of 2023. Including the Forex AMM v1.0 on Polkadot!
Consider supporting us by the nominating of your tokens to the Kusama or Polkadot validator going by the POLKADOTTERS name.
