R3 to launch private permissionless blockchain DeFi network, issue token – Ledger Insights

R3, known for its enterprise blockchain Corda is planning a private permissionless network as a layer 2 solution on Ethereum. R3 is not a one-trick pony and has an important privacy technology, Conclave, which is the key confidential computing technology behind the new Obscuro network announced today at the CordaCon 2021 conference. The company is also planning to issue a regulatory compliant utility token to power the Obscuro network.

The business case

It sees a need for this kind of solution because of demands for privacy, to address the front running activity prevalent on public blockchains, and as a scaling solution for Ethereum.

Transparency is one of the key features of public blockchains. It’s an enormous asset, but for users that want privacy, it’s a liability. Some don’t believe that DeFi can enter the mainstream without enabling privacy.

But there’s a bigger issue. It’s widely known that public blockchains are prone to front running, in which miners can see proposed transactions and can insert their own trades ahead of the transaction they previewed. Dubbed “miners extracted value“, this front running activity is estimated at more than $1.4 billion.

During the DeFi boom in the last 18 months, Ethereum mainnet has become increasingly congested. More and more transactions are being executed on Layer 2 solutions, which essentially execute the trades on a second network and then batches the results onto the main network. Obscura plans to be one of these networks.

Conclave and Obscura

The Obscura network will run a series of nodes that use Conclave software technology running on servers with Intel SGX processors. This works in a similar way to a black box, where individual users encrypt transaction data so that other users can’t see it. Only the software running inside the secure enclaves on the Intel SGX processor can decipher the transactions and output results. This addresses the front running issue. 

However, Obscura is planning delayed transparency so that the transactions are obscured initially, preventing front running, but that shield is later revoked so that criminals can’t hide behind the privacy.

The project is still in the early stages, with a whitepaper to be released sometime in the next month, development in the next six months, and the network and token to be launched some time in 2022. It aims to avoid moving away from the composable legos at the core of DeFi and will have an explicit governance mechanism.

Another agenda

Hearing that R3 is driving a layer 2 solution on Ethereum is bound to raise a few eyebrows. But this solution can also address some of the enterprise issues involved in using Ethereum on permissioned networks. 

For example, the Bank of Thailand and Hong Kong Monetary Authority has been working on a cross border central bank digital currency (CBDC) solution currently powered by enterprise Ethereum technology Hyperledger Besu. 

Today the central banks published a paper showing progress in saving time and money for cross border payments. However, it also highlighted three technology drawbacks, at least two of which could be addressed by Obscura, and perhaps even the third.

Because of privacy preserving mechanisms the central banks found it hard to execute payment versus payment transactions across borders. And the CBDC solution does not allow a single entity to see all pending transactions, which means the liquidity savings mechanism used for netting transactions is sub-optimal. Conclave and Obscura could likely address both of these issues. The third challenge is scalability as the number of central bank validators grows. As a layer 2 solution, it’s possible Obscura might help here too.