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P2P DeFi

· 13 min read
Denicio Bute
Denicio Bute
Community Content Lead - CF

In this interview, Rusty, also known as fallen-icarus on X, shares his vision for a truly decentralized financial system. He discusses the flaws in today’s DeFi models, which often rely on centralized mechanisms, and explains why a shift to P2P DeFi is necessary. Rusty breaks down key concepts like liquidity sharing, UTXO contention, and free-market solutions, offering a fresh perspective on making DeFi more scalable, efficient, and accessible. To learn more about the P2P DeFi solution Rusty proposes, check out the full interview below.


Hello, Rusty! It’s a pleasure to connect with you today. Before we dive into the exciting work you’re doing with P2P DeFi, can you share a bit about your background and what led you to the world of blockchain and Cardano?
I've always had a passion for economics, which led me to take a couple of gap years after college to study the field more deeply. During this period, I also taught myself programming, which allowed me to start applying economic principles to the world of decentralized finance (DeFi). I realized that traditional financial systems could be improved with blockchain technology, and when I came across Cardano, I saw the potential to create something better in DeFi.


You’ve mentioned that you’re in the right place at the right time with the right background. Can you explain why you took the leap into DeFi and how your self-study in economics and programming helped you develop your ideas?
After completing my studies in economics, I found that many finance professionals, especially in market-making roles, weren’t focused on creating new markets. I realized there was a gap in understanding how to structure a decentralized economy from scratch. By self-studying programming and economics, I was able to combine my passion for both and begin experimenting with new ideas in DeFi.


For those unfamiliar with decentralized finance (DeFi), could you explain what DeFi is and how it’s different from traditional finance?
DeFi is the movement to decentralize traditional financial services like lending, borrowing, and trading using blockchain technology. Unlike traditional finance, which relies on centralized institutions, DeFi operates on decentralized protocols that allow individuals to interact directly with financial services without intermediaries. This means better control, transparency, and security for users.


For those unfamiliar, could you explain what P2P DeFi is and how it differs from traditional decentralized finance models?
P2P DeFi allows individuals to interact directly with one another for financial services, like trading, lending, and borrowing, without relying on intermediaries. Unlike traditional DeFi models that may still have centralized components, P2P DeFi empowers users to connect directly and handle transactions in a fully decentralized manner. This ensures control remains in the hands of the users, with blockchain guaranteeing security and transparency.


You’ve spoken about rebuilding Cardano’s DeFi ecosystem from the ground up. Why do you believe this is necessary, and what is your vision for it?
The core idea is that TradFi's market structure evolved over thousands of years. So why are we throwing all of that out to pursue the all-in-one approach? Because TradFi is centralized, it doesn't have any technological bottlenecks. There are no restrictions on transaction sizes, throughput, etc. There is no blockchain trilemma. Yet it doesn't use an all-in-one approach for markets. Why not? There must be legitimate reasons not to.

Instead of relearning market design the hard way, my vision is to build DeFi the way TradFi works. Certain parts can be upgraded using blockchains while still keeping the overall market structure of TradFi.


What are the major challenges you’ve identified in the current DeFi structure, and why do you think it’s crucial to rethink how DeFi works on Cardano?
The main challenges include high transaction costs, scalability issues, and liquidity problems. The current DeFi structure on Cardano also relies too heavily on centralized delegation, which poses security risks. We need to rethink these elements to create a more efficient, scalable, and secure system that benefits users rather than limiting them.


One of the key points you’ve raised is the high cost of DeFi on Cardano. What are the main factors that drive these costs, and how do you propose reducing them?
The high cost is mainly due to the inefficient way transactions are batched, along with the difficulties in optimizing multiple features at once within an all-in-one design. My proposal is to shift to a layered approach that separates different functionalities, which would reduce the complexity and cost of maintaining multiple features in one system.


Scalability is another challenge you’ve highlighted. What does scalability mean in the context of DeFi, and what specific issues are causing it to be a barrier right now on Cardano?
Scalability in DeFi refers to handling more users and transactions without a big increase in costs or delays. Right now, Cardano’s DeFi struggles with scalability, but not just because of UTxO contention. The all-in-one approach is part of the problem, as it faces the blockchain trilemma: you can’t have both high throughput and censorship resistance at the same time. This forces dApps to make trade-offs.

UTxO contention itself isn’t the main issue; it’s the current solution (batchers) that’s holding scalability back. A free market approach can help by allowing for a layering method that doesn’t run into the same problems with UTxO contention. In my opinion, UTxO contention has become a scapegoat for broader issues.


Why is it important to integrate economics into the design of DeFi systems, and what does that look like in practice?
Economics plays a crucial role in ensuring that a decentralized financial system functions efficiently and sustainably. By applying economic principles, such as the concept of free markets, we can design systems that manage resources more efficiently, reduce costs, and improve liquidity, ultimately benefiting users and the ecosystem as a whole.


Let’s talk about dApps design. You’ve compared the all-in-one approach to a layered dApps design. What’s the difference between these approaches, and why do you believe the layered design is better for scalability and cost optimization?
The all-in-one approach tries to bundle all features into a single system, which works well initially but becomes inefficient as it scales. It sacrifices features and increases complexity. The layered approach, on the other hand, separates the different functionalities into distinct layers that can be optimized individually, leading to better scalability and cost management.


You’ve also explained how UTXO (Unspent Transaction Output) contention is a key issue in Cardano’s DeFi. Can you explain what UTXO contention is and how it affects DeFi transactions? How can free markets solve this problem?
UTXO contention occurs because each UTXO is only usable once, and always having to share them between multiple users is inefficient. This leads to higher transaction costs and delays. By introducing free markets to manage UTXO contention, users can pay for exclusive access to UTXOs, fostering competition and reducing fees.

In the scenarios where sharing UTxOs makes sense, free markets force batchers to compete against each other which will drive down their fees, as well. Batcher fees are artificially high right now because there is no real market competition between batchers.


The concept of a “two-in-one transaction” is very interesting. Can you break down what this transaction looks like and how it benefits DeFi applications in terms of liquidity and fungibility of native assets?
A two-in-one transaction combines two different operations into a single transaction, which improves efficiency, minimizes risk, and enables liquidity sharing between decentralized applications (dApps). From a user perspective, this means you can finally use DJED to pay back a loan in USDM! The demand for two-in-one transactions will be huge! In fact, it will be so large that there will be incentives to provide liquidity specifically for two-in-one transactions. They are the missing piece when it comes to attracting liquidity to DeFi order books.


You’ve mentioned liquidity sharing among dApps as a key component of your solution. How does this liquidity sharing work, and why is it so important for DeFi’s success?
Liquidity sharing allows different dApps to tap into a common pool of liquidity, making it easier for users to trade or access assets without having to rely on a single dApps liquidity. Not only does this improve overall market efficiency and reduce the risks associated with liquidity fragmentation, but it also makes it significantly easier to launch new dApps. Bootstrapping liquidity is one of the hardest parts of launching new DeFi dApps. Now they don’t have to; new dApps have immediate access to a single, blockchain-wide source of liquidity.


You’ve pointed out the risks of concentrated dApps, particularly in terms of asset control and delegation. Can you explain the difference between concentrated and distributed dApps, and why distributed dApps are critical for security and stability in DeFi?
Concentrated dApps concentrate assets and delegation control in the hands of a few, which creates security risks and potential points of failure. Distributed dApps, on the other hand, let participants keep custody and delegation control of their assets. The assets are distributed across all of the DeFi users. This makes them more secure, resilient, and less prone to attacks.

You introduced beacon tokens as a solution for distributed dApps. Could you explain what beacon tokens are and how they facilitate user discovery and decentralization in the system?
Since distributed dApps have assets distributed across all of the DeFi users, how do users find each other? Concentrated dApps don’t have this issue because all of the assets are centrally located. It turns out, Cardano native assets can be used to “tag” UTxOs. Then users can filter the UTxO set by these “tags”. The concept is similar to organizing your files with tags or colors so that you can quickly filter them later. Beacon tokens are native assets whose main purpose is to tag UTxOs. This allows Cardano participants to use the UTxO set as a “public message board” where they can easily filter the messages to find the ones relevant to them. The beacon tokens are what make distributed dApps truly P2P - no third party is required to facilitate interactions between peers. All you need is a Cardano node; even a light node will work!


You’ve designed a suite of four P2P DeFi protocols. Could you briefly explain each of these protocols and how they work together as part of your broader DeFi vision?
The four P2P DeFi protocols are:

  1. Order book protocol – Designed to share its liquidity with all dApps.
  2. Credit market protocol – Uses a trustless credit history for decentralized lending.
  3. Options trading protocol – Allows for decentralized options trading.
  4. Aftermarket protocol – Supports secondary market trading of assets.

Each protocol is designed to be the layer 1 for each of their respective markets, but they work together which blurs the lines between each market. Since the idea is for them to be the foundation to build entire ecosystems on top in the same way the Linux Kernel is the foundation for entire operating systems and businesses, these protocols are effectively Cardano’s DeFi Kernel.

Just like the Linux Kernel, the DeFi Kernel is completely free to use and has no licensing restrictions on how it can be used. This means there are no extra fees (e.g., DAO fees, pool fees, and batcher fees) aside from the Cardano transaction fee.


Is the DeFi Kernel live? How can I interact with it? Yes, it’s live on Testnet and the order book and credit market protocols are currently undergoing auditing. There is a prototype desktop light wallet you can play around with today by downloading the latest AppImage from the p2p-wallet github. The p2p-wallet README has links to a demo video as well as comprehensive tutorials on how to use it. They showcase just how cheap and easy it is to use the DeFi Kernel. In most cases, it is 10-100x cheaper than the current DeFi!

https://github.com/fallen-icarus/p2p-wallet


Final thoughts—what excites you the most about the future of P2P DeFi, and what should the Cardano community be looking forward to?
Cardano has the right architecture to support the best DeFi ecosystem in the entire crypto space. The eUTxO model is perfect for DeFi! People just don’t see it yet because it is being misused. Once we start using it properly, Cardano’s DeFi could be in the top 5 within 5 years. It is currently ranked about 19th…

ref: https://defillama.com/chains


Maybe a question I should have asked earlier, but I figured, let’s not close without asking: What do you enjoy doing in your free time, outside of the world of crypto? I enjoy learning how the universe works. And by that, I don’t just mean physics. I mean everything: how the human body works, how societies work, how the mind works, what does it mean to live a good life, etc. My curiosity has led me across so many different fields; economics was just one stop along the way. I guess you could say I’m an aspiring polymath.

This curiosity is what actually led me to Cardano in the first place. When I approach a problem, I always try to see it from the perspective of many different disciplines (e.g., computer science, economics, psychology, etc). So when I came across the question “Which blockchain will have the best DeFi in 50 years”, I used the same method. And all perspectives led to the same answer… Cardano.

It is still possible for Cardano’s development to go astray, just like its DeFi has over the past few years. But that is why I’m getting more involved; I want to nudge it back in the direction it was meant to go and keep it on that path.


Tell us about your team. Who are the people behind P2P DeFi? There isn’t really a team behind P2P-DeFi. The DeFi Kernel is meant to be a community collaboration just like how the Linux Kernel is a community collaboration. So far, the coding has been entirely me. But several community members have already started getting involved with brainstorming where the DeFi Kernel should go. The main ones right now are:

I hope to see many more people get involved in the future!