🔥🔥dusk

Introduction

In my eyes, as I look at the development of open blockchains, there are two antagonistic forces; first, the necessity to be transparent and second, the necessity to be private.  Decentralized ledger systems like Ethereum have demonstrated that financial transactions of a global scale can be managed by decentralized ledgers but the data is publicly stored on these systems.  Such transparency conflicts with the facts of regulated financial markets, where secrecy, compliance and speed are also vital.  Dusk establishes itself as the solution to this issue. Theoretically built to be used in regulated markets, it is based on zero-knowledge cryptography and a purpose-built consensus mechanism to provide a privacy-enabling and compliant transaction.  This article gives me an insight about the functionality of Dusk, its significance and positioning in the greater market.

Understanding the need of privacy with compliance.

In conventional finance, the positions of parties and avoidance of front-running are safeguarded by confidentiality. Public blockchains compromise such privacy as all people can see account balances and histories of their transactions. To overcome this, Dusk incorporates the innovative cryptographic methods enabling participants to demonstrate the adherence to regulations without divulging the underlying information .  Zero-knowledge proofs may be used to verify regulatory rules (e.g. anti-money-laundering checks or restrictions on securities transfers) in such a way that the auditors can only view what they legally have access to. This selective disclosure renders Dusk appealing to institutions that are required to comply with such regulations as the Markets in Crypto-Assets (MiCA) and MiFID II of the European Union.  The thing that interests me the most is that Dusk is aiming to offer the privacy of Monero but allow compliance of standard exchanges.

Technology under the hood

The architecture of Dusk is not based on an existing chain; it is designed to handle regulated finance. Succinct Attestation (SA) is the basic consensus algorithm. It ensures finality of transactions within seconds, satisfying the need of financial markets (high-throughput, low-latency).  SA is a proof-of-stake system in which block producers and the validators are attesting the block with zero-knowledge proofs.  In order to share information fast, Dusk employs Kadcast, a peer-to-peer protocol that is based on Kademlia distributed hash table. Kadcast organizes the network into hierarchical trees and sends messages to peers in successively further distances to consume less bandwidth and propagate messages rapidly and reliably.

The network is sustaining two models of transaction that are complementary:

1- Moonlight - an account-based transparent model like Ethereum.  It is applied in operations requiring or acceptable full visibility.

2- Phoenix - UTXO-based model, which allows transparent and obfuscated transfers. Transaction amounts and participants can be hidden in the city of Phoenix yet the compliance can be verified by authorized auditors.

This mix model allows Dusk to operate two types of activities on the same chain: privacy-sensitive and public. Zedger, a smart-contract framework of confidential securities and corporate actions, is run on top of these models.  Zedger focuses on token offering security and conventional financial instruments, which offer on-chain settlement and corporate governance solutions, as well as maintain confidentiality

The conceptual visualization of the layers of importance of Dusk is below. The bottom steps are base privacy and consensus, whereas the top steps are compliance and market adoption:

Dusk's token and incentives
The network relies on an in-house asset, DUSK, to create economic incentives alignment. Stakeholders of DUSK participate in the SA consensus and, therefore, have the right to generate blocks and receive fees. DUSK is also implemented to charge transaction fees and to compensate validators and provisioners that ensure the security of the network. In my opinion, this design is reflective of other proof-of-stake systems, except that there is a regulatory twist: to be eligible to produce blocks, participants are subject to compliance rules. This design will promote good behaviour and prevent the malicious actors because a misbehaving node might lose its stake.
Market acceptance and regulatory congruence.
Dusk has been keen to target controlled markets. Capabilities to issue and redeem security instruments, corporate governance functions such as dividend distributions and share issues, and provide auctions to issue private assets are attractive to issuers, banks and exchanges. In contrast to privacy oriented currencies like Monero, Dusk is realistic; it provides partial transparency to allow regulators to perform audits whilst keeping sensitive information concealed. This practice is not in isolation in Europe since regulators are coming up with more explicit laws in digital assets. I feel that compliance features will be a major unlock to institutional adoption.
The SA consensus and the Kadcast network are performance oriented networks. Fast finality decreases the settlement risk, and the multicast architecture of Kadcast can decrease network congestion. Together they form a blockchain environment capable of competing with the available financial infrastructures in speed and reliability.
The chart below illustrates my vision of the trade-off between transparency and privacy; on one side, completely open ledgers such as Ethereum; on the other, completely private systems such as Monero. The balance is the goal of Dusk, as the equilibrium curve depicts.

Challenges and risks

No project is without risks. Dusk uses elaborate cryptography and the security of zero-knowledge proofs should be ensured by subjecting them to intensive scrutiny.  The success of the network is pegged on the acceptance by financial institutions; the acceptance will ensure that the gain of privacy with compliance is real. In addition, regulatory environments may alter.  As Dusk is now in compliance with European standards, new legislations or other standards in other jurisdictions may pose challenges. Recent analysis observed that investors need to take into account the execution risk, competitive stress of established blockchains and uncertainty of regulatory schedules.

Conclusion

In my opinion, Dusk is an intelligent project to balance the transparency of blockchain and the privacy expectations of conventional finance. Its Succinct Attestation consensus, two-way transaction and zero knowledge compliance provide a platform on which issuers can tokenize shares, settle trades immediately and keep them private.  The fact that Dusk focuses on alignment of the regulations also makes it unlike privacy coins that tend to neglect the compliance.  Alongside technical and market risks, the emphasis of the project to address the real problems with the help of the advanced cryptography makes it one of the most intriguing blockchain projects in the field of institutional finance. It is yet to be determined whether Dusk will form the foundation of securities markets of the future, but it does show the possibility of privacy and regulation existing in decentralized systems.

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