Dusk Network gives financial freedom with user-controlled assets

Dusk Network’s mission is to return complete and direct control to the user over their own assets, while at the same time making sure that they are always fully compliant.

Emanuele Francioni, one of the founders of Dusk Network, shares the mission and vision of the future of finance that Dusk provides. In a recent blog post he points out the limitations of the existing financial system. He follows this by arguing how Dusk Network provides the solution, and gives a brief explanation of zero-knowledge proofs. He goes on to show how compliance for the individual can be fully automated, and ends by explaining how Dusk Network can solve the inefficiencies in financial markets by tokenizing assets such as stocks, bonds, mortgages and many others on-chain. 

While the mission might appear deceptively simple, it does require a fundamental rethinking of mainstream technology. Such an overhaul comprises a decentralized ledger to serve as a global settlement layer, zero-knowledge cryptography to safeguard private data, and essential protocols such as Citadel and Zedger. Citadel enables privacy-preserving digital identity on Dusk, and Zedger provides a regulatory framework for the compliant handling of financial instruments.

Francioni: Our team is composed of experts in diverse fields who are working towards our common mission. The research team is dedicated to exploring new developments in zero-knowledge cryptography, computing security, and FinTech. They are responsible for developing breakthrough technology such as PlonKup, Succinct Attestation, Phoenix, etc. The development team then implements those technologies into our software libraries, which form the foundation of our blockchain and virtual machine stack. Dusk’s libraries are also widely adopted by many other projects.

We also have a team of regulatory experts who tackle official matters that most other projects tend to avoid. With so many different aspects in play, it’s clear that Dusk is a game-changer.

To sum it up, we want to give you an overview of the key building blocks of Dusk, how they fit together, and most importantly, why and how they will change the way we approach finance and ownership for the better.

The topics we will cover are:

• The current limitations
• Dusk’s solution
• Zero-knowledge proofs
• Automated Regulation
• On-chain tokenization

The limitations of the current financial system

The current financial system has a lot of limitations, many of which we take for granted and blindly accept just the way they are. Those limitations present challenges to both individuals and institutions.

Individuals have limited autonomy over their assets due to the custodial nature of our financial systems. We let someone else hold our assets, from government bonds to salaries in a bank. This is mainly because the practicality of holding gold bars or piles of cash at home is quite debatable.

Institutions, on the other hand, have huge overhead costs and allocate significant resources toward regulatory compliance and data management. This process is replicated across each bank, with very little scaling or universal solutions, despite the other banks doing exactly the same thing. Not to mention liquidity being fractured across all these custodians.

The lack of self-custody translates directly into a stagnation of innovation in the financial market and an abundance of inefficiencies.

For example, arbitrage, which aims to correct and profit from price inefficiencies, is risky and out of reach for most people in traditional financial infrastructure. In contrast, the DeFi market provides innovative technology, such as flash-loans, that are freely available to everyone. The lack of self-custody and direct control over digital assets stifles innovation and creates barriers to financial inclusion and economic freedom.

Dusk’s solution

Dusk’s solution is to provide infrastructure that is intrinsically compliant, private, and efficient. We believe that by embedding these principles directly within the core protocol, we’ll not only enable greater opportunities for innovation and wealth, but, most importantly, we will help the transition toward a fairer and more inclusive economy, where direct ownership and value play a fundamental role in empowering everyone to achieve financial freedom.

The protocol is engineered as a decentralized ledger technology (DLT) capable of providing fast transaction settlement, as well as immediate finality, and sybil-resistance. Every node in Dusk’s network is equipped with software with native support for zero-knowledge cryptography (ZK), which ensures the privacy and scalability of the ledger and its transactions. This is different from all other blockchains that use ZK, where the technology is kept separate from network protocol.

Instead, Dusk protocol makes use of ZK cryptography everywhere, from Rusk, our confidential smart contract platform, to all other functionalities, such as Citadel, a zero-knowledge proof, soulbound NFT that is ideal for digital identity and universal KYC.

The next thing we must consider is regulation. In order to break out of the crypto sandbox and interact with real-world financial instruments, it’s necessary to ensure compliance with the regulatory frameworks that govern those assets, such as stablecoins, but also bonds, ETFs, or other kinds of securities. Here is probably where Dusk protocol shines the most. In fact, by enabling compliance to be encoded, we can ensure the integrity of transactions and entirely remove the possibility of any violation.

You may have heard the expression “code is law”, well we made it so that law can now be encoded.

The self-driving car

To illustrate the importance of self-custody, let’s imagine owning a car. Since you own it, you can use it anytime you like and don’t have to ask anyone for permission. You can even modify it, change its interiors, paint it, add a better sound system. This is the self-custody element. It’s yours. You have direct control over it.

But even if you are in control over your car, you still need to follow the rules of the road. You can’t drive on the opposite side of the road, for example, and there may be places you can’t drive or park. There are limitations on what you can legally do with your car.

However, with a self-driving car, all limitations are automatically enforced. Self-driving cars would come pre-programmed with compliance baked in, removing entirely the possibility of any traffic rule violation.

In today’s financial ecosystem, you are not allowed to take direct ownership and control over your assets. It feels just like using your own car as a taxi, driven and handled by someone else. The absence of built-in regulations means that someone else is driving (i.e., performing operations on your assets) on behalf of owners who are not trusted to follow the rules. As a result, without custody over your property, you must rely on the custodian to perform any operation you desire. Unfortunately, traditional brokers have no incentives to introduce novelties, but instead see them as a risk and a liability, considering that any undesired side-effect would threaten their license.

In contrast, the DeFi market provides innovative technology (i.e. flash-loans, AMMs, liquid staking, etc) precisely because the owner is directly responsible for his or her assets, and can freely operate according to his or her own risk appetite. This fosters access to financial inclusion and economic freedom and helps correct inefficiencies in the market. For example, arbitrage of DeFi assets is possible without the use of a leverage instrument and as such it presents very few risks and is accessible to everyone, while in traditional finance arbitrage operations involve higher risks due to leverage and are out of reach for most people.

Zero-knowledge proofs

At Dusk, we believe that privacy is a right, not a privilege. That’s why we co-founded the Leading Privacy Alliance, and it’s also why zero-knowledge proofs (ZKPs) are such a critical part of our project.

To provide a quick overview of ZKPs, they enable users to prove something to a verifier without revealing any information. An example I like to give is if you’re trying to get into a bar and need to be over a certain age. Using ZKPs rather than showing your ID and sharing your date of birth, your name, your address, etc, you would generate cryptographic proof that you meet the criteria. No other information is provided, just that you satisfy the minimum age requirement.

Privacy is essential for both traditional financial instruments and new web3 ones. The absence of privacy is an obstacle to mainstream adoption, since it’s highly improbable that professional organizations will ever accept settling their dealings in the open and having their whole financial history public.

At the same time, we don’t want to promote secrecy or backroom deals. There has been a long-standing lack of transparency in the financial system, which has led to people becoming distrustful of the institutions that govern and regulate them.

ZKPs help us to keep our critical information private from unwanted prying eyes such as blockchain snoopers, overreaching governments, and even angry ex-partners. They allow us to stay above board and ensure that transactions are legitimate, while also protecting sensitive information.

While the concept of ZKPs is fascinating, the research required to create a system that can construct these proofs at scale and speed is significant. That’s why we have a dedicated research team that is working hard to push this cryptographic tool forward and turn it from a concept into a reality that can power global infrastructure.

Citadel

Citadel is a ZKP, privacy-preserving, soulbound NFT product that we have developed, and it has many advantages for both individuals and institutions.

KYC can be very costly for institutions. They have to invest large amounts of money to store and validate data and identities while also complying with regulations. They must confirm that people are who they say they are, secure the data, and store it in a way that is compliant, particularly in the case of EU institutions who must comply with GDPR. This is particularly prohibitive for small and medium enterprises for whom the costs of compliance in holding a user’s data are not offset by the advantage this can offer.

With Citadel, they no longer have to bear this expense. Individuals can complete their KYC once using Citadel and then receive a cryptographic seal of approval that they can use to interact with various services, from trading to streaming, which establishes a kind of global identity layer. This frees up significant resources for companies, who can allocate their resources to more meaningful activities.

For individuals, Citadel offers the benefit of protecting their data, as well as the assurance that their information isn’t held in multiple locations. Not only would they enjoy the convenience of completing their KYC only once to access all available services, but they would significantly decrease the chance of having their personal information stolen or doxxed (which happened with Celsius, FTX, LastPass, etc).

Automated compliance

The cost of compliance is immense. The amount of resources required to comprehend, implement, and enforce it are enormous, not to mention the cost of prosecuting fraud, money laundering, and other illegal activities.

By being the custodian of their users’ assets, institutions are very distrustful of anyone’s implementation but their own. This leads each institution to duplicate the technology infrastructure that implements the exact same sets of rules, alongside maintaining duplicates of their users’ personal data and KYC/AML information, despite the fact that the rules and this information don’t vary across platforms.

To explain the supreme inefficiency of such a practice, let me offer a silly, but efficacious similitude. If the regulations were a song everyone has to listen to, each institution is paying a different band to come to perform the song for their users, rather than redirecting them to a single online streaming platform. In this example, Dusk would be the online streaming platform everybody can use.

With Dusk, the features of user’s self-custody and compliance automation at the protocol level, offer the opportunity for a universal infrastructure for each standard regulatory framework which the network supports (at the moment those are MiCA and Mifid II).

In short, by adopting Dusk, each institution would intensely benefit from avoiding the staggering costs of creating and maintaining their own system infrastructure as well as developing new products such as KYC-as-a-service (which they could offer without any transmission of personal data, thanks to the power of zero-knowledge cryptography equipped by Citadel).

Tokenize everything

The final point I will touch on today is our belief that there is a huge inefficiency in the current financial market, which is that different asset classes cannot move freely. With Dusk, we can tokenize a vast range of assets on-chain, from stocks to shares to bonds to your mortgage and more.

This will allow for greater capital efficiency, as while a bond and a stock might be different things off-chain, on-chain they are just bytes and can be traded and moved with more fluidity and ease. These types of activities are currently either impossible or very costly with a high barrier to entry.

Through blockchain technology, we can see real equality of financial opportunity, and open up the full suite of financial instruments – including those not yet seen – to everyone.

The future of finance and ownership

At Dusk, we are fully committed and dedicated to revolutionizing the financial industry, and our approach to doing so is unparalleled. As far as we know, no one else is addressing the issues we are, and we’re proud to be blazing this new trail.

To help others understand what we’re building, we’re starting a new initiative where our team of experts – including researchers, developers, and thought leaders – will contribute articles that delve into their work, vision, and expertise. We want to make it easy for everyone, from crypto investors to institutions to developers, to understand and get involved with our groundbreaking project.