Key Takeaways

  • Rai Finance is an emerging DeFi protocol built on Polkadot.
  • It offers interoperable asset trading, social trading, and private, off-chain transactions for traders.
  • Many of these features won’t launch until next year, however.

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Rai Finance is a DeFi platform built within the Polkadot ecosystem. The project aims to rectify many of the pain points facing projects built on Ethereum by moving to a more scalable network. 

Though congestion has dwindled since the summer months, there are few near-term solutions to Ethereum’s scalability problems. The launch of ETH 2.0’s Beacon Chain is promising, but users won’t enjoy the upgrade’s benefits for another few years. Thus, with so many popular DeFi apps built on this network, competitors have emerged to offer a superior service. 

There are alternative blockchain networks like Cosmos, EOS, Tron, and Cardano that look to become DeFi’s new home alongside Polkadot. Even Ripple has joined the race thanks to a recent integration with Flare Networks.

Each of these networks also has a handful of similar project offerings in the way of an AMM-based decentralized exchange, non-custodial lending and borrowing, as well as yield farming opportunities.

For now, however, Polkadot appears to be the leading competitor. Popular Polkadot-based DeFi projects include Stafi, Acala, Centrifuge, and Polkastarter

Rai Finance is following this trend but adds a handful of unique features. These include ZK-Proof transactions, self-balancing token sets, and, thanks to the base protocol, interoperability with different asset standards and market-making algorithms. 

Whether these will be enough to make the project successful remains to be seen.

Rai Finance Bets on Polkadot

Rai Finance is betting on the continued success of both DeFi and Polkadot. 

So far, the decentralized finance movement shows no signs of stopping, even despite the various hacks and bugs discovered this year. The sector has become a mainstay within the crypto industry. 

DeFi growth for 2020. Source: DeFi Pulse
DeFi growth for 2020. Source: DeFi Pulse

When one scrolls through the various projects contributing to this volume, it becomes immediately clear that Ethereum currently dominates the sector. The only exception to this is the inclusion of Bitcoin’s Lightning Network. Still, the Layer 2 solution only commands $20.7 million of the entire sector’s $14.61 billion at press time. 

The data aggregator doesn’t, however, incorporate the various activities happening beyond Etheruem and Bitcoin. 

Another DeFi project built using EOS called Flamingo Finance, for instance, attracted nearly $2 billion upon launch. This project was marketed primarily to a Chinese DeFi audience. 

The Tron network has also been working hard to cultivate a thriving DeFi ecosystem. This can be seen in the various Ethereum-like projects such as JustSwap. Unfortunately, JustSwap’s volume has been inflated by millions of dollars due to wash trading. 

This suggests that the platform does not enjoy real, organic utility. 

Users, volume, and transactions on JustSwap in the past 30 days. Source: DappRadar
Users, volume, and transactions on JustSwap in the past 30 days. Source: DappRadar

Though each of these networks boasts higher throughput than Ethereum, their success has been temporary. Both Flamingo and JustSwap enjoyed high volumes thanks primarily to enticing incentives. Once these incentives ended, volumes tanked along with the value of any associated tokens. 

The bet on DeFi was not incorrect, but perhaps each project built on the least promising blockchain. Rai Finance is putting this theory to the test.

Polkadot has been one of the most highly-anticipated networks in crypto. It finally launched its mainnet in 2020, ushering in a wave of projects, each of which betting on the various shortcomings of Ethereum. 

Gemini join the crypto exchange

Beyond Polkadot’s scalability advantages, Rai Finance has chosen the network for its ability to interact with other blockchains, including Ethereum. Snowfork is just one of many bridges between Polkadot Ethereum. This project allows any loans, derivatives, or ERC-20 tokens to move between both blockchains. 

The base layer and the emerging Polkadot-based ecosystem allow projects like Rai Finance to focus on several more nuanced features such as tokenize trading sets, off-chain transactions, and access to multiple types of market-making algorithms.

Unpacking Rai Finance

Social Trading

Rai Finance is incorporating one of the more attractive products in retail finance: Social trading. 

Made popular by platforms like eToro, social trading merges communities interested in trading and learning about specific assets and markets. eToro has achieved this through its Popular Investor program, offering amateur traders access to more professional traders of equities, precious metals, and even cryptocurrencies. 

In DeFi, Set Protocol has launched a similar offering. Unlike eToro, Set Protocol allows traders to follow popular crypto investors in a non-custodial manner. dHedge and Melon Protocol are other examples of the community-based trading sector.

Rai Finance will roll out a similar offering in Q4 2021, according to marketing materials. Users will be able to tokenize a trader’s activity and withdraw the token and exchange it for fiat currency or alternative cryptocurrencies. 

Additionally, users and traders alike can stake native RAI tokens to signal their confidence in a particular strategy. Traders thus earn on the success of their strategy and the yield from the tokens that followers of their strategy stake. This mechanism is not dissimilar from eToro’s offering.

RAI token’s economics will be discussed later in this article.

Zero-Knowledge Proofs

The second feature that Rai offers is that of private, off-chain transactions. For those who have been following the Layer 2 discussions, Zero-Knowledge Proofs (ZKPs) have emerged as one of many scalability solutions in Ethereum. Matter Labs is focused on this precise venture.

Instead of storing each transaction on-chain, Rai Finance and other ZKP-centric outfits would allow blockchains to store a smaller, less data-heavy hash of a batch of transactions. This batch of transactions would be conducted off-chain and then validated on-chain. 

Because Rai is at its core a decentralized trading platform, using this technology will keep the platform from getting clogged with orders. Matter Labs has boasted that their iteration of ZKPs can reach “VISA-scale throughput of thousands of transactions per second.” 

It remains to be seen if Rai can achieve something similar. 

ZKPs also offer traders additional privacy advantages not possible on most public blockchains. It is effortless for traders to copy lucrative Ethereum addresses using services like Nansen and HAL. 

Market-Making Variability

The final component of the Rai Finance offering revolves around the protocol’s interactions with various market-making algorithms. 

There are several brands of Automated Market Makers (AMMs) in DeFi. Uniswap is the most popular and uses a specific type of AMM called a Constant Product (CPMM) or Constant Function (CFMM) market-making algorithm. Balancer and Curve are quite similar to Uniswap, except they allow for more than two assets in a pool and offer traders more flexibility in splitting the weights between each asset. 

Dodo Exchange is another decentralized exchange (DEX) that uses a much different market-making algorithm called Proactive Market Maker (PMM). The Dodo team has made this change to right many of the wrongs within the current market-making space. For their work, they have earned substantial investment and interest from many big names in crypto. 

And as technologists and computer scientists continue to explore this niche, more efficient algorithms will continue to emerge. This will ultimately create siloed markets where certain assets become more liquid on one platform and less so on others. Traders will need to keep tabs on liquidity on multiple exchanges to enjoy the best rates and lowest slippage. 

It remains to be seen whether this is a true problem for those in the Defi space, but Rai Finance is nonetheless attempting to solve this emergent issue. The team behind Rai is working to build a one-stop-shop for all market-making algorithms. 

There is, however, little information available regarding the technical details of this feature. 

At the time of press, the team has only launched a basic swap function similar to Uniswap. 

Rai Finance Community and Team

The Rai Finance team comprises its CEO Kevin Lee, CTO Minkyu Cho, and CMO Sandy Liang. All three members have a minimum of three years working in the crypto space. 

Before Rai, Cho also co-founded DEXEOS, a popular DEX platform built on EOS, and League of Traders, a South Korean social trading application. These accolades are highly relevant to the Rai Finance offering. Wizpace is the technology partner behind DEXEOS, League of Traders, as well as Rai Finance. 

Rai has attracted 2,880 followers on Twitter and 3,297 members on Telegram. 

In October 2020, the project raised $1.5 million in investments led by GBIC and Alphabit.

Interested readers can review the project’s codebase on Github and experiment with its first and only swap feature. According to Rai, the team will be rolling out the majority of its features next year. The most notable date being the main launch on Polkadot in Q2 2021.

There is very little info available on the RAI token launch outside of a proposed circulation of 1 billion tokens. Rai said that the token “will be used for mining, ecosystem, community and team rewards.”

Final Thoughts on Rai Finance

Betting on the continued success of DeFi and Polkadot is a viable thesis for any blockchain startup. As mentioned previously, the sector is booming despite the various pitfalls in the summer of 2020. 

Likewise, Polkadot has perhaps the best chance of taking market share than other “Ethereum killers” in the space. Users should also be aware of new additions to this list of competitors like Near Protocol and AVA Labs. Each boasts improved scalability as well as interoperability features. 

But as this article has outlined, Rai Finance is also tapping into the growing social trading trend. Allowing less-experienced traders to access the insights of more seasoned professionals has already proven to be successful in other venues like Set Protocol and eToro. 

And in line with Polkadot’s interoperability features, Rai is also creating an interoperable market-making platform. Whether traders find this useful remains to be seen. 

Based on their background working with other Layer 1 protocols, DEXes, and social trading venues, the Rai team has enough experience to execute on all fronts as well.

Though they have only launched a basic swap product at the time of press, users should keep in mind that there are many new offerings in store for 2021. 

In the spring or early summer next year, Rai will begin rolling out updates. 

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