Among the factors that are causing financial institutions to be slow to adapt to the use of blockchain technology is compliance risk, and not technological risk. The bulk of blockchains were built with open and free-value transactions, and compliance matters are left to be dealt with at the application level. This is usually associated with fragmented compliance, and this is what Dusk Network seeks to change through their fundamental shift, where compliance is a native aspect of their network.
"Protocol-level compliance" means that the rules for regulated assets are enforced by the network. Rather than each application implementing their own concept of what it means to be compliant, "Dusk delivers a shared runtime that enforces compliant behavior for all applications." This is important for tokenized securities, which are required by law to comply with a certain set of rules in regard to issuance, ownership, transferability, and reporting.
A key pillar in the compliance engine built into Dusk's system is the concept of deterministic execution. What this means is that all transactions on the network are carried out according to predetermined rules that application-level logic cannot override. For any kind of regulated asset, this ensures that all transactions, such as settlement and transfer, and changes in actual ownership, are conducted only when all protocol requirements are satisfied.
One of the biggest hurdles in tokenized assets is the enforcement of eligibility and transfer restrictions. On most blockchains, the process of checking for eligibility is done either off-chain or by the centralized gatekeeper. This causes failure points and inhibits composability. On the Dusk network, eligibility conditions can be directly expressed within the logic of the assets, and enforcement can be carried out by the protocol during execution.
The other key characteristic of the compliance tool set of Dusk is its auditable nature. For financial markets to comply with the regulatory requirements, there needs to be a clear and traceable record of transactions as well as changes of ownership. This requirement is fulfilled by Dusk as it allows all activities carried out on the regulated assets to be traced on the block chain. This goes on to provide a traceable record of activities.
Most importantly, the aspect of auditability on the Dusk network does not come with the risk of making sensitive information public. This is because the network is meant to be operated in a way that is conducive to transparent compliance; hence, the needed oversight can be obtained without making unnecessary information available to the public.
Compliance on Dusk is also composable. Since compliance rules are enforced on the protocol level, multiple applications can use the same regulatory assets without having to replicate the compliance rules. This resolves one of the biggest inefficiencies of DeFi, where assets are locked into their respective platforms. On the Dusk network, once a regulatory asset has been created on a compliant framework, it can be transferred freely across compatible applications without losing the advantages of compliance.
Settlement is another space where end-to-end compliance adds value. A fiat financial infrastructure has to work with delayed settlement cycles, thereby increasing counterparty risk. While other systems on the DeFi space take time to perform settlement, with the help of Dusk, atomic settlement is made possible on-chain, and ownership transfer and settlement happen in one single, complaint transaction.
More evidence of the need for protocol-level compliance is given by corporate actions. Such actions include the payout of dividends, coupon payments, redemption notices, and voting events. These processes need to occur in a correct and predefined way. On the Dusk platform, such events can be implemented in a way that is compliant with smart contracts and results in the enforcement of the rules by the network itself.
The $DUSK token is a crucial part of ensuring the security of this compliance stack. Validators lock up DUSK in order to validate blocks on the network and have economic skin in the game in order to comply with the rules described by the smart contract. This creates an environment in which institutions can have confidence in the knowledge that the rules on the network are not only established, but additionally enforced.
The other advantage of the method employed by Dusk is lower operational cost. This is because through their compliance incorporation into the system, the financial institutions will not have to develop systems to ensure comprehensive compliance on their applications. This will background developments, and financial functionality can be created without having to develop compliance as well.
From a regulatory standpoint, protocol-level compliance makes it easier to monitor the system. Regulators and auditors can monitor the rules and system behavior of the network and do not require the monitoring of all applications. This approach to compliance translates a disjointed application by application approach into a system-based infrastructure, where supervision is more in line with traditional financial markets.
The fact that Dusk's compliance solution is so applicable is the fact that Dusk's solution is built solely for tokenized assets and not based on generic blockchain technology. The structure of the network acknowledges the nature of the financial industry, which is to be accountable, auditable, and governed through enforceable laws. Thus, it would be hard to overlay or substitute Dusk's blockchain technology simply through renaming.
Through the transitioning of compliance functions from the edge of the ecosystem to its center of activity, Dusk provides a platform for a novel class of regulated financial applications that are capable of having transactions settled on a blockchain network. Such applications allow for tokenized securities issuance, trade, and management.
In this context, Dusk is not trying to circumvent any regulation but rather to operationalize it on-chain. Protocol-level compliance assures that regulated assets automatically behave well, by default, which creates less risk for both issuers and investors and also regulators alike. Positioning DUSK Network as a go-to infrastructure layer for real-world financial markets in their transition to blockchain-based systems, where $DUSK secures the integrity and reliability of this compliance-first approach.
