How Decentralized Service Level Agreements Could Help With Hedging Infrastructure Risk

by Guillermo Jimenez
7 ways to make with crypto

How Decentralized Service Level Agreements Could Help With Hedging Infrastructure Risk

This article looks at how decentralized service level agreements (SLAs) could help with hedging against infrastructure risk, such as delegation risks with Proof-of-Stake (PoS) blockchains.

Blockchain technology has allowed for users to transact and send value in a “trustless” environment by removing third-party middlemen. The most basic example of this is Bitcoin, which allows anyone to send and receive money without the need to trust a bank or money transmitter. 

Since then, many other, more complex examples have appeared especially with the emergence of the Decentralized Finance (DeFi) sector which allows users to access advanced peer-to-peer (P2P) financial services that were only once possible through the use of financial institutions. These services include loans and saving accounts, decentralized trading and much more.

However, cryptocurrencies are still just a small subset of the economy and, in order to conduct themselves in the financial world, people are still forced to rely on centralized service to buy or sell crypto for fiat currencies in order to pay for goods, services and utilities. To do so, users are forced to trust third-party exchanges which can, of course, be fallible and prone to issues like hacks, leaks or even insider scams or fractional reserve systems.

Why Trustlessness Is Still Not Here

While we now have access to decentralized exchanges (DEXs) of all sorts, fiat on and off ramps still need to be centralized in one way or another and there are other examples where trust is required. This applies to cryptocurrencies, the financial world, but also to all other kinds of services. 

Often times, users will willingly and knowingly rely and trust third-party services for a multitude of reasons, including for convenience and due lack of expertise or capital. But, as most of us know by now, with increased convenience, comes increased exposure to risk.

This has led to the creation of a novel trust delegating service which leverages the use of peer-to-peer technology in order to allow trust to be “shared” or delegated from one person to another, allowing those who can handle exposure to risk to do so for others who don’t want to deal with it.

Decentralized Service Level Agreements

With this in mind, companies like Stacktical are coming up with solutions to mitigate this issue while trust is still required. One such solution is the DSLA Protocol. The DSLA protocol uses decentralized Service Level Agreements (SLAs) to allow different stakeholders of a given service to trade third-party risk with each other.

Decentralized SLAs leverage blockchain technology to provide peer-to-peer outsourcing contracts that store and release cryptocurrency, based on the performance analytics of third-party services.

Running on the Ethereum blockchain, Stacktical’ DSLA Protocol aims to automate third-party risk management with a service that will launch on March 31, 2021, with L2, Harmony and Avalanche deployments to follow shortly after, allowing for faster settlement times and lower service fees.

This service provides an extra layer of trust to the user-provider relationship, guaranteeing consistent returns for users, and by incentivising providers to provide the best possible services in several parameters, including speed, power, uptime and more, instead of simply providing coverage like insurance products.

Current Use Cases and the Road Ahead

There are multiple use cases for decentralized SLAs. According to Stacktical, this novel service will bring additional security to the Decentralized Finance (DeFi) and Non-Fungible Token (NFT) sectors by allowing developers and infrastructure operators to reduce their users exposure to service delays, interruptions and financial losses. 

A practical example of this is the use of decentralized SLAs to reduce the financial losses of proof-of-stake delegators and DeFi users, while incentivizing the good performance and reliability of staking pool operators and DeFi service providers such as Uniswap (AMM) and OpenSea (NFT), among others. 

While there are still a lot of advancements to be made, decentralized SLAs are helping users mitigate the use of interacting with the world of DeFi which has seen as being extremely risky. In the future, this type of system may also be used in the legacy financial sector, allowing for an ecosystem where trust is not only required, but also welcome. 

Featured Image by “xresch” via Pixabay.com

The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment, or other advice.

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