Blockchain DeFi Innovation Insights from Patents

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©2021 TechIPm,LLC All RightsReservedhttp://www.techipm.com/
Blockchain DeFi Innovation Insights from Patents
Alex G. Lee1
Patents are a good information resource for obtaining the state of the art of the blockchain DeFi (Decentralized
Finance) technology innovations insights.
I. BlockchainDeFiTechnologyInnovationStatus
Patents that specifically describe the major blockchain DeFi application technologies are a good indicator of the
blockchain DeFi technology innovations in a specific innovation entity. To find blockchain DeFi technology
innovation status, patent applications in the USPTO as of January 10, 2021 that specifically describe the major
blockchain DeFi application technologies are searched and reviewed. 26 published patent applications that are
related to the key blockchain DeFi application technology innovations are selected for detail analysis.
Following figure shows blockchain DeFi patent application landscape with respectto the innovation entity. As
shown in the figure, the blockchain DeFi technology innovation entities are Shapeshift AG, Factom Inc, Salt
Lending Holdings Inc, Akiva Capital Holdings LLC, bZx, Jointer Inc, Novera Capital Inc, PeoplebrowsrInc,
ProsperFunding LLC, ProtoblockInc, Quest Ventures, RockStable Token Inc, Securrency Inc, Totle Inc,
Transparent Financial Systems Inc, and Vvow Co Ltd, which are mostly blockchain/FinTech startups/SMEs.
1Alex G. Lee, Ph.D/Patent Attorney, is a principal consultant at TechIPm, LLC.

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ShapeshiftAG
15%
Factom Inc
8%
SaltLending Holdings Inc
8%
Akiva Capital
Holdings LLC
4%
Andrew Bryan
4%
Bing Liu
4%bZx
4%
James E. Satloff
4%
Jianxin Wu
4%
Jointer Inc
4%
Novera Capital Inc
4%
Patrick B. Dugan
4%
Peoplebrowsr Inc
4%
Prosper
FundingLLC
4%
Protoblock Inc
4%
Quest Ventures
4%
Rock Stable Token Inc
4%
Securrency Inc
4%
Totle Inc
4%
TransparentFinancial
Systems Inc
4%
Vvow Co Ltd
4%
DeFi Patent Landscape USPTO 4Q 2020

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Following figure shows the blockchain DeFi patent application landscape with respect to the key technology
innovation field. As shown in the figure, Decentralized Asset/Fund Management is the most innovated blockchain
DeFi technology followed by Decentralized Lending and Borrowing, Stable Coin, Decentralized Exchange (DEX),
Decentralized Derivatives, Decentralized Margin Lending and Trading, Non-fungible Token, Decentralized Oracle,
Price Discovery, Decentralized Payment, and Decentralized Staking Pool.
Decentralized Asset/Fund
Management
23%
Decentralized Lending and
Borrowing
19%
Stable Coin
19%
Decentralized Exchange (DEX)
15%
Decentralized
Derivatives
4%
Decentralized Margin Lending
and Trading
4%
Non-fungible Token
4%
Decentralized Oracle
PriceDiscovery
4%
Decentralized
Payment
4%
Decentralized StakingPool
4%
DeFi ApplicationsPatent Landscape USPTO 4Q 2020

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II. BlockchainDeFiTechnologyInnovation Details
Patent information can provide many valuable insights that can be exploited for developing and implementing new
technologies. Patents can also be exploited to identify new product/service development opportunities.
A. DecentralizedExchange (DEX)
DEXs allow users to retain controlof their digital assets as trades are mediated by way of smart contracts on a
blockchain. DEXs also enables users to trade all types of digital assets in a safe, secure, and transparent way
compare to the centralized exchanges (CEXs). DEXs’ atomic swaps allow users to exchange the digital assets
across different blockchains using smart contracts to verify transactions on other blockchains without trusting a
third party.
As the number of users involved in the DEX trading increases, the liquidity for all digital assets will increase.
However, most of the DEX implemented smart contracts have failed to generate significant volume due to
inefficiencies in their design that impose high friction costs onmarket makers. In particular, these implementations
place their order books on the blockchain which requires market makers to spend money each time they post,
modify or cancel an order. While the costof a single transaction is small, frequently modifying orders in response
to evolving market conditions is quite expensive. In addition to imposing high costs onmarket makers, maintaining

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an on-chain order bookresults in transactions that consume network bandwidth and bloat the blockchain without
necessarily resulting in value transfer.
Thus, in the order book-based DEXs, users need to wait a long time for their orders to be filled in the order book.
To solve the issue with the order book-based DEXs, liquidity pools-based DEXs were introduced in which digital
assets are automatically traded by an algorithm rather than an order book. Liquidity pools are created using the
automated market maker (AMM) smart contracts2 and reserve digital assets in smart contracts in order for users to
buy or sell digital assets instantly from the available digital assets in the liquidity pool. Examples of liquidity
pools-based DEXs are Bancor3 and Uniswap4.
Margin trading in CEXs enables an investor to trade leveraged positions using borrowed funds from a broker
(margins) to trade a digital asset, which forms the collateral for the loan from the broker. Recent innovations in
DeFi brings margin trading on DEXs. Examples of DEXs offering decentralized margin trading are dYdX5 and
bZx6.
2Automated Market Makers for Decentralized Finance (DeFi): https://arxiv.org/abs/2009.01676; Balancer Whitepaper:
https://balancer.finance/whitepaper/.
3Bancor Protocol: https://storage.googleapis.com/website-bancor/2018/04/01ba8253-bancor_protocol_whitepaper_en.pdf.
4Uniswap v2 Core: https://uniswap.org/whitepaper.pdf.
5dYdX: A Standard for Decentralized Margin Trading and Derivatives: https://whitepaper.dydx.exchange/.

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US20190370792 (Peer-to-peercryptocurrency and crypto asset trading platform) illustrates a system to supporta
decentralized cross-chain digital asset exchange. The decentralized cross-chain digital asset exchange is based on a
threshold signature scheme to facilitate a decentralized cross-chain digital asset exchange. The system provides a
universal, secure and direct way for traders to exchange digital assets across different chains without hassle. The
benefit of this mechanism is that it applies to the signature level instead of the protocollevel. Regardless of the
protocollimitation of the blockchain, there is no limitation for the proposedsystem when applied to different
blockchains.
The system enables seamless application of the decentralized cross-chain digital asset exchange across different
blockchains even the underlying blockchain does not supportmultisig. Further, the system enables a protocolthat
can practically apply threshold signature as the digital signing technology. The protocolallows two mutually
distrusting parties to jointly exchange digital assets such that both parties receive the other party's digital assets or
neither one does. Furthermore, the threshold signature can be universally applied to most blockchain platforms
because the threshold signature applies at the signature level instead of the native blockchain protocollevel and
there is no dependency on the blockchain protocolto provide compatibility in the way of changing core code, input
scripts or smart contracts.
6bZx Light Paper: https://bzx.network/pdfs/bZx_lite_paper.pdf.

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Further, the platform is transparent to all parties and anyone who can access blockchain nodes or block explorer
can witness the transfer of ownership that is required to complete the trade. Furthermore, instead of favoring a
heavy loading order bookmechanism for price discovery that is usually used in CEXs and DEXs, the system
proposeprogrammable market maker tools that empower market makers to design their algorithmic trading
strategy so the offer of trade is always available, and the trade is fulfilled automatically from the market maker's
side. Furthermore, the system enables market takers complete trades almost instantly as a result of the availability
and liquidity provided by market makers. Furthermore, the system operates without the need to register an account
beforehand.
The decentralized cross-chain digital asset exchange platform includes a trading platform, a user equipment, a
communication network and a blockchain network. The trading platform allows peer/party/users placing their
desire trading pairs and price, serving as an escrow for the peer trading and recording and showing the trading
history of the trader. The user equipment component includes mobile, browser, application, browser extension and
blockchain client, which served as the front-end to interact with the trading platform and sending transaction to the
blockchain. The communication network allows the message handshakes between trading platform, trading peers
and blockchain network. The blockchain network allows the communication to the blockchain.
The decentralized cross-chain digital asset exchange platform implements a protocolfor the digital asset trading
peers to form a threshold wallet with the trading platform on the related digital asset blockchain, in which the

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wallet can be controlled by both the exchange platform and any of the trading peers cooperatively. The digital asset
exchange platform enables a protocolto claim the digital asset from the threshold wallet for both success and
unsuccessfultrade, and a method to discourage peer from placing fake order and match order without sending any
digital assets.
The protocolfor the digital asset trading peers to form a threshold wallet with the platform includes several rounds
of message exchange for Threshold-Gen-Key algorithm and Threshold-Gen-Signature algorithm. The protocolto
claim the digital asset from the threshold wallet for both success and unsuccessfultrade includes checking the
outstanding balance of the threshold wallet via different blockchain network, performing Threshold-Gen-Signature
algorithm between the trading platform and any one of the trading peers.
The method to discourage peer from placing fake order and match order without sending any digital assets includes
tracking and showing all the trading history of the trading peers, allowing peers to acceptor reject for any matching
orders, allowing peers choosewho they can trade with.
US20200211109 (Methods and systems for margin lending and trading on a decentralized exchange) illustrates a
decentralized system that enables lending and borrowing for margin trading. DEXs are still lacking the capabilities

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of many of the leading CEXs. Especially, individuals looking to engage in margin lending or margin trading are
still forced to funnel their liquidity to CEXs, exposing them to a form of counterparty risk.
Counterparty risk is encountered when the risk of a third party defaulting jeopardizes the digital assets of an
investor. Margin lending exposes the lender to counterparty risk both from the exchanges and the borrower. The
specific type of avoidable counterparty risk incurred by lenders and borrowers using CEX is called custodial risk;
allowing individuals to maintain controlof the private keys to their wallets at all times obviates this risk. Lenders
face additional counterparty risk from underwater borrowers who fail to be liquidated in time.
Decentralized margin comes with significant technical challenges. The most significant challenge is the design of a
reliable oracle that can match the settlement security of centralized exchanges. The oracle problem is caused
because Ethereum contracts are not natively aware of digital asset prices on or off the blockchain. If smart
contracts can't stay aware of asset prices on the open market, they can't consistently force-liquidate borrowers on
that market to protect lenders from adverse movements. The most serious obstacle to decentralized margin lending
is being able to reliably and securely liquidate troubled positions.
The developed decentralized system can be easily integrated into new and existing exchanges. The system benefits
lenders such that lenders will be able to loan their digital assets for lucrative interest without risking moving their
digital assets onto centralized exchanges that can be compromised. Likewise, the system benefits traders such that

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traders are able to margin trade without moving their digital assets onto centralized exchanges that can be
compromised. Finally, the system benefits decentralized exchanges such that decentralized exchanges benefit from
increased volume, better feature provision, and trading fees.
US20190385156 (Decentralized Crypto Token Swap Platform on Mobile Device Apps) illustrates a decentralized
digital asset swap platform utilizes smart contracts and protocolimplementations to supportthe peer-to-peer
trading of digital asset based on different blockchains and different standards. The platform is designed for both
same-chain and cross-chain cryptocurrency trading.
Following figure illustrates a decentralized digital asset swap process forsame-chain digital asset trading.

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Let’s assume that user A possesses 1 ERC721 token and would like to exchange it for 0.5 ETH. First, User A
creates a request order and publishes it to the transparent OrderBook. The OrderBook contains all the digital asset
swap request order information will be available to the public through open, transparent storage. The OrderBook
can use a cloud-based storage, or be placed on a public blockchain.

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User B queries open orders from the OrderBook and sees User A's request order. User B takes User A's order and
calls the Approve function from the Ethereum Swap Smart Contract using the Swap Smart Contract's contract
address and digital asset approval value (This function gives the Swap Smart Contract access to the digital asset to
be traded). This will approve 0.5 ETH of User B's wallet to the Swap Smart Contract with signature from User A's
request order. Once this function is successfully called, User A will be informed through direct messaging.
User A can manually approve the ERC721 token to the Ethereum Swap Smart Contract or set up auto approval
when call the Approve function (automatically match orders). Once the Approve function is completed, User A
will notify the Settle Controller.
The Settle Controller then will transfer the exchanged digital asset through the Settle function of the Swap Smart
Contract using User A and User B's wallet addresses, crypto token amounts, crypto token contract addresses,
expiration time, nonce number, and signatures. It will decodeapproval data based on request order data. The Settle
Controller uses the expiration time, nonce number and the signatures to validate the swap. User A's collectible will
be sent to User B and User B's 0.5 ETH will be transferred to User A through the smart contract. If the swap is
validated, the crypto tokens being exchanged will be transferred to the other party.

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For cross-chaindigital asset trading, all processes are the same with same-chain digital asset trading except for the
Settle Controller section. The Settle Controller requires one extra step to protectthe fairness of the cross-chain
digital asset swap process as shown in the following figure.

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An “oracle” is an entity that provides the desired extrinsic value. Disadvantages of existing oracles include:
disagreement over the correctextrinsic value (e.g., when a digital asset trades at different prices on different
exchanges); writing to a blockchain can be costly, inducing the oracle to reduce its volume of extrinsic data points
to save money, thus causing the reported value to become stale; the oracle has an incentive to report a false value to
profit from manipulating applications and markets relying on; the oracle cannot be properly compensated for
providing the real-world observation and recording the value, etc. If an oracle relies on prices of executed trades of
digital assets, there is also a “ping-pong” problem, on low-liquidity markets where the last trade is not necessarily
reflective of the real price of the asset if there is a large spread between bids and asks.
US20200143471 (Decentralized Blockchain Oracle Price Discovery Platform with Bi-Directional Quotes)
illustrates a decentralized blockchain oracle price discovery platform that is not susceptible to abuse and
manipulations, thus allowing market participants to hedge or insure against short term price movements. The
decentralized blockchain oracle price discovery platform also provides a reliable and cost-effective oracle service
for any decentralized application relying on a stream of extrinsic data.

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B. DecentralizedLending and Borrowing
Traditional lending and borrowing platforms require human resources often in the form of a third party to facilitate
and ensure a properexecution of creating, documenting and managing agreements between a lender and a
borrower. Thus, the traditional lending and borrowing platforms are costly, inefficient, time consuming and
susceptible to errors and security breach of critical data belong to the contractual parties.
Decentralized lending and borrowing platforms provide an automated and secure platform through which
interested entities engage in requesting or offering access to capital in exchange for offering or accepting a digital
asset as collateral for securing the capital. The decentralized platform automatically creates a smart contract
between a borrower and a creditor/lender, which enables a requesting party to secure a loan or a line of credit in
exchange for offering the requesting party's digital asset as collateral. Through the smart contact, the platform
automatically monitors the performance of all parties according to their rights and obligations as set in the contract
and manages contractterms in responseto the performance of all parties or fluctuations in the value of the
underlying digital asset.
Flash loan7 as a smart contract service in the decentralized lending and borrowing platforms allow borrows to
borrow lender’s funds without collateral as long as the funds plus a fee is repaid within the same blockchain
7Towards understanding flash loan and its applications in defi ecosystem: https://arxiv.org/abs/2010.12252

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transaction. While providing convenience, it brings considerable challenges such that bad actors to exploit
vulnerabilities in DeFi platforms for attacking on the platforms.
Examples of decentralized lending and borrowing platforms are MakerDAO 8 and Compound 9. The Dai stable
coin (DAI) is a collateral-backed cryptocurrency whose value is designed to be stable relative to a given fiat
currency, such as the United States Dollar. DAI is administered and managed by a decentralized autonomous
organization (DAO) called MakerDAO. MakerDAO provides a smart contract platform on the Ethereum
blockchain that backs and stabilizes the value of DAI related to a fiat currency through a dynamic system of
Collateralized Debt Positions (CDPs), autonomous feedback mechanisms, and incentives to external actors.
Collateralized Debt Position (CDP) is an agreement, generally enforced via smart contract, which permits an asset
holder to deposita digital asset, and borrowa corresponding amount of DAI. The borrowed DAI must be repaid to
withdraw the collateral asset. A CDP is collateralized in excess (overcollateralization), meaning that the value of
the collateral is intended to be higher than the value of the generated DAI.
8The Dai Stablecoin System Whitepaper: https://makerdao.com/whitepaper/DaiDec17WP.pdf.
9Compound Whitepaper: https://compound.finance/documents/Compound.Whitepaper.pdf.

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MakerDAO enables anyone to leverage their Ethereum assets to generate DAI on the MakerDAO Platform. Once
generated, DAI can be used in the same manner as any other cryptocurrency: it can be freely sent to others, used as
payments for goods and services, or held as long-term savings. The generation of DAI also creates the components
needed for a robustdecentralized lending platform. Users also can obtain DAI by buying it from brokers or
exchanges
Holders of DAI can utilize the DAI Savings mechanism to earn a steady, low-risk return (Annual Percentage Yield
(APY)) on their holdings based on the DAI Savings Rate. Anyone who has collateral assets can leverage them to
generate DAI using MakerDAO 's CDPs. Generally, a collateral asset is a digital assetthat the decentralized
MakerDAO governance process has recognized and input into the system. Forexample, Ether cryptocurrency
(ETH) is one form of digital asset that may be recognized as a collateral asset.
CDPs are smart contracts that hold collateral assets deposited by a user and permit the user to generate DAI in
exchange for controlof the collateral asset. However, generating the DAI also accrues a debt. This debteffectively
locks the deposited collateral assets inside the CDP smart contract until it is later covered by transferring an
equivalent amount of DAI to the CDP smart contract, along with accrued interest, at which point the collateral
asset can be withdrawn. In the MakerDOA platform, if the value of collateral in a CDP drops below the total debt
(e.g., borrowed amount+accrued interest), the CDP can be liquidated and terminated.

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In the MakerDAO platform, holders of DAI can be considered as indirect lenders to CDP users, since DAI holders
essentially serve to provide liquidity to the debt generated by CDP users. In view of this, DAI holders can be
referred to as lenders and CDP users can be referred to as borrowers, even though there need not be any direct
lending or borrowing between any parties. That is, any lending and borrowing can be indirect via the distinct
mechanisms of DAI Savings and CDP smart contracts.
Compound is a decentralized lending platform that allows borrowers to take out loans. Lenders provide these loans
by locking their cryptocurrencies into the company protocol. The correspondinginterest rates paid or received
depend on the supply and demand related to specific digital assets given by the lenders (liquidity digital asset
staking). Compound allows lenders to earn an interest rate well above that of a typical US bank account exploiting
the yield farming protocol10 (liquidity poolsmart contracts).
US20200143466 (Blockchain-based lending systems and methods) illustrates a decentralized lending and
borrowing platform with a decentralized governance process. Using an innovative cross-chaindecentralized
application that simplifies the user experience with “off-chain loan agreement matching with on-chain settlement,”
the decentralized lending borrowing platform provides a trustworthy ecosystemfor users to securely lend and
10What Is Yield Farming? The Rocket Fuel of DeFi, Explained: https://www.coindesk.com/defi-yield-farming-comp-token-explained.

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borrow digital assets. The platform can connect different blockchains and sidechains simultaneously and smoothly
without needing a trusted third party to form a digital ecosystem.
Loan contracts on the platform can be automatically created and executed. The technique described as “off-chain
agreement matching with on-chain settlement” is a hybrid solution, which combines the efficiency of centralized
communication channels for reaching loan agreements, with near instant settlement of on-chain loan agreement
implementation. In this approach, loan offers and requests can be broadcasted through the off-chain platform. An
interested counterparty can submit these similar counteroffers off-chain, and the loan requester can modify, change,
pause or cancel the loan request seamlessly. Once two parties agree on the loan contract terms, the settlement can
happen on the blockchain instantly. Friction costs canbe minimized for loan requesters becausethey can signal
intent off-chain and smart contract-based transactions occuronly when a loan agreement is finalized.
The platform design allows for cross-chain compatibility to integrate with different blockchains through smart
contract. Multiple blockchains and sidechains can be used to provide a blockchain-based secure, decentralized, and
scalable payment system with each with different features and functionality. Cross-chain compatibility can provide
the ability to offer a more diverse range of digital assets for lending. Moreover, the platform does not need to
function as a trusted custodian. Instead, user digital assets can be stored on the blockchain within a smart contract,
so no single entity will have authority to touch those digital assets until certain pre-agreed conditions are met,
which may can custodian risks, avoidance of cyber-attacks, and reduction in transaction costs.

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US20200327609 (Systems and methods for tokenized controlof smart contracts) illustrates an automatically
conducting a continuous forward rate agreement in a cryptocurrency using smart contracts. A forward rate
agreement is a contractto fix an interest rate for borrowing/lending on a specific principal amount for a specific
period of time. The continuous forward rate agreement (CFRA) is a variant of a forward rate agreement that
incorporates the continuous aspects of an interest rate swap. In a CFRA, the amount owed can be a function of an
externally-defined rate or rates over the life of the contract. This is in contrastto a conventional forward rate
agreement, in which the amount owed is computed solely based on the rate at the expiry of the agreement term.
An obligation object is generated and provided with control of the first smart contract, which can be a CDP smart
contract, and control of a lender amount. The obligation object is executed to update balances for the first and the
second parties until the obligation object is liquidated or terminated. Additional parties can be introduced. Upon
liquidation or termination, the obligation object accounts to each of the parties based on their balances, and based
on tokens generated to track positions in the obligation object.
US20200082360 (Systems and methods for implementing a smart stablecoin and facilitating the trustless smart
swap of cryptocurrency) illustrates a stability protocolbased on a smart contract algorithm that is designed to

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completely eliminate the possibility for any volatility in the first place can be achieved by preventing the user from
selling the cryptocurrency above or below the current (fixed) face value. A high level of price volatility is the key
problem of cryptocurrencies and the technology behind them. Volatility for a cryptocurrencyis typically created by
a user willing to exchange an amount of that currency above or below the market value. Because a sourceof
volatility in the future cannot be known, traditional stability mechanisms such as use a currency peg or collateral or
any predicting method cannot ensure a truly “stable” coin. Additionally, these stability mechanisms do not address
a run on bank scenario in which multiple redemptions can cause the price to crash or a rapidly rise.
The stability protocolis designed to process atwo-way transaction. On one side the sender can send the
cryptocurrency to a receiver, but on the other side the receiver must send back in return cryptocurrencyor, an
invoice, or receipt with same value as the cryptocurrency. In the event that the value of the exchange does not
match, the smart contractbalances the face value between the sender and the receiver by returning the extra value
to whom it belongs. The two-way nature of the smart contract means that the cryptocurrency cannot be traded
speculatively, since the value of the cryptocurrency is enforced. By using the smart contractto prevent the
exchange of the cryptocurrency above or below its face value, the stability protocolis able to remove the volatility
created by these exchanges, thereby stabilizing the value of the cryptocurrency.

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