Decentralized finance (DeFi) emerged as a standout application of blockchain technology in late 2017 and broke into the mainstream in 2020. Decentralized finance represents a vision of a financial system that operates without intermediaries such as banks and other third-party entities. It instead relies on the power of smart contracts to facilitate transactions.
DeFi applies the transparency and security of distributed financial technologies to traditional finance use cases like borrowing, lending, and trading. In short, it seeks to revolutionize how we think about finance and promote a more accessible, democratized financial system.
Charkha is a decentralized lending protocol built on Kadena’s Chainweb blockchain. The protocol was developed by Thomas Honeyman, a senior engineer at Awake Security, as the final project in a Pact tutorial series titled Real World Pact.
We’ll be catching up with Thomas today for an insightful and engaging discussion on the Charkha lending protocol and what he likes about building with Pact and Chainweb!
Charkha is a minimal decentralized lending protocol inspired by Compound Finance, which runs on Ethereum and, as of March 2023, has roughly $1.5 billion in total value locked. Charkha demonstrates a mixture of intermediate DeFi and Pact language concepts, as well as how to build a frontend for a real-world blockchain backend.
It’s got all the features of a real-world lending protocol: you can borrow or supply funds, earn rewards in the CHRK token for participating, use your CHRK holdings to create and vote on proposals to change the protocol, and liquidate a user’s holdings when they’ve exceeded their borrowing capacity and become risky. These are concepts you’ll see all over the DeFi world.
On the development side, Charkha contains all the components of a real-world DeFi project, including:
A development guide, which explains how we translated the white paper into smart contract implementations.
A collection of commented smart contracts that implement the protocol and tests.
A TypeScript + React frontend that shows the current markets and their interest rates and allows you to lend and borrow assets, submit governance proposals, liquidate under-collateralized accounts, and more.
There are also helper scripts so you can deploy Charkha to your own local version of Chainweb and interact with the protocol — it’s fully functioning. That said, this is a teaching project only! Don’t try to use any of the code in the real world, as it’s never been audited or stress-tested and is just for example’s sake.
The biggest difference between Charkha and other lending protocols is that it’s a teaching project. That means I’ve kept it simple — there’s not much to do beyond lend, borrow, withdraw, repay loans, earn rewards, create and vote on proposals, and liquidate user borrows when they have exceeded their borrowing capacity. It’s also thoroughly commented, includes a white paper and development guide, and has plenty of tests and some formal verification; this should help intermediate Pact developers see concrete examples of how to write their own DeFi applications.
However, there are other differences, too. Charkha is built with Pact, a Kadena smart contract language specifically designed for writing secure smart contracts. It can’t save you from all bugs, but it’s much harder to make common mistakes with Pact, especially with a built-in formal verification system (which Charkha uses.)
Also, Charkha can be deployed to Chainweb, a scalable, multi-chain blockchain with super low gas fees and enormous throughput capacity. As part of the project, we deploy Charkha to devnet, which is a development version of Chainweb that mirrors how the real blockchain works.
Blockchain technology is fascinating, but when I learned about it I struggled to see how it improved on existing technologies except for the narrow use case of a digital currency. It wasn’t until I saw some of the work being done on decentralized finance that things clicked for me. Of course, DeFi is still nascent and there have been serious missteps so far, but it represents a meaningful innovation in the financial industry.
Lending is a critical, high-trust activity in a community or economy. We have all sorts of mechanisms in society to reinforce this trust — from the law and regulation to collateral requirements to the strength of personal relationships. It’s incredible that you can facilitate lending via a blockchain and do so transparently, without trusted intermediaries — and most importantly, it works. I think that lending, borrowing, trading, and stablecoins together provide a prototype for an alternative financial system, albeit a limited one.
I wanted to build a meaningful teaching project on Chainweb, and a lending application felt like the right choice.
Some of my favorite features of Charkha include the community governance process and the decentralized lending and borrowing.
In Charkha, one CHRK token per market is divided amongst the market participants on every block; the higher your share of a market, the higher your share of that block’s CHRK. What’s interesting about CHRK is that it’s a fungible token we implement in Charkha according to Pact’s fungible token interface (KIP-0005), and it’s used to create and vote on community proposals that change the protocol itself.
Since CHRK is a fungible token, it can be traded just like any other token. Charkha even supports a money market in CHRK, which means users can take out loans for the sake of voting (for example), paying potentially high interest rates for the privilege.
The protocol is decentralized, so there is no administrator who mints CHRK. The rewards go straight to user accounts, so protocol developers can’t withhold rewards or mint CHRK to manipulate a vote. Plus, when the vote closes, the protocol change takes effect immediately, without the intervention of the protocol developers. It’s autonomous.
There are all kinds of design decisions in Charkha that ensure that the protocol can work with zero intervention from an administrator. When you lend funds to Charkha, they go into an account owned by the protocol — but Charkha is designed so that the only access to these funds is via the API explicitly supported by the protocol. No developer can just swoop in and transfer funds elsewhere. Pact makes this kind of fine-grained access control very easy with its capabilities feature.
I appreciate the thoughtful restrictions that Pact places on smart contract development. It’s Turing-incomplete, so it disallows recursion and loops, which is a source of many bugs in Solidity. It’s immutable, so variables can’t be reassigned. If you want mutation, you can use a database and perform updates via normal database interactions, which cannot be done from outside your Pact module. There’s an explicit system for access control called capabilities, which makes it trivial to require that 2 of 3 keys were used to sign a transaction and they allow a specific block of code to be called (rather than allowing the transaction to do anything it wants with their signatures.)
It can be strange to describe a language in terms of its restrictions instead of its abilities, but these restrictions don’t meaningfully reduce what you can develop with Pact. They just change your development approach and help you avoid shooting yourself in the foot. Smart contract mistakes can be extremely costly! They also enable some incredible features that set Pact apart, such as its ability to formally verify properties about your smart contracts. In Charkha, I’m able to verify that the total market borrows never exceeds the total market supply.
I haven’t spent much time with Chainweb directly — it’s the infrastructure below my smart contracts — but the most visible part of it is the gas fees paid on each transaction, and I certainly like seeing my transactions cost a fraction of a cent instead of the absurd fees seen on other blockchains.
We hope you enjoyed learning about Charkha! Many thanks to Thomas for sharing his work on a truly phenomenal DeFi lending app in Pact.
You can see the full project on GitHub:
For the full Real World Pact series, please visit: GitHub - thomashoneyman/real-world-pact: Real-world smart contracts and apps built with Pact &… *Real World Pact is a collection of thoroughly-commented, fully-functioning example projects that demonstrate building…*github.com