What is DeFi (Decentralized Finance)? What is the ecosystem behind it?

What is DeFi? DeFi is essentially just a traditional financial tool based on blockchain. First, the Ethereum blockchain is used for this purpose. DeFi applications are mainly based on open source protocols for creating and distributing digital assets. Their advantage is especially that they aim to provide significant benefits of operating on public blockchains, such as resisting censorship and improving access to financial services. In this way, the DeFi movement has solved the important core standards of cryptocurrency, namely, the promise of making money and making its transactions universally accessible. This applies to everyone, no matter where he or she lives in the world.

DeFi movement has taken this commitment a step forward. It aims to provide a global open choice for all available financial services today. These capabilities include:

Deposit and loan transactions, insurance and so on. All you need is a smart phone or a computer with Internet access.

So you can use smart contracts. People who have read our knowledge article about Ethereum already know that smart contracts are self-executing contracts. These make it possible to develop more complicated functions than simply automatically executing the sending and receiving of cryptocurrency. This decentralized application is called dApps.

In the DeFi environment, dApp already exists and can:

What is the difference between DeFi and the traditional financial system? Of course, the key question is: Why should we use these DeFi-dApp completely? After all, all these mentioned products already exist in traditional banks or Wall Street peers. Unfortunately, this is only true in some parts of the world. There are several differences. The core of dApp and its related business processes is not managed by companies, institutions or individuals. Instead, these processes are automatic, and relevant rules are hard-coded in smart contracts. There, they are visible to everyone and transparently expressed in the form of code.

Once the smart contract is implemented in the blockchain, it can be executed with little human intervention. So everyone can see DeFi-dApp except the pen name. They cannot be directly assigned to the user's real identity. DeFi-dApps can be used anywhere in the world where the Internet can be connected. They are anti-censorship, because smart contracts and visible codes are automatically executed, and even without intermediary, the conclusion and/or use of contracts are credible and transparent.

Not without reason, DeFi is one of the fastest growing industries in the field of cryptocurrency. Cryptographic currency worth more than $600 million has been invested in related smart contracts, so it has also been invested in infrastructure. What are the most important and popular use cases and projects in DeFi field? Now let's take a closer look.

1. Open credit agreement-everyone can use it.

Compared with any other category of DeFi in Ethereum, open credit protocol may attract more attention recently. To a great extent, due to the use of Dai, the rapid growth of other P2P protocols (such as Dharma) and the establishment of liquid mineral pools such as composite finance, decentralized loans have attracted widespread attention, which is natural. Compared with the traditional loan structure, open and decentralized loans have many advantages.

The integration of digital asset lending, digital asset insurance, real-time transaction processing and new secured loan methods has expanded the access scope, standardization and interoperability of people who cannot use traditional services, and can reduce costs through automation. Pledged loans using open agreements such as MakerDAO and Dharma are designed to minimize the need for trust. They achieve this goal by using the function of smart contract based on Ethereum. Open-ended agreement loans are completely limited to public blockchain, which has some interesting long-term effects on expanding global financial inclusion. Markel Road is the most famous decentralized loan agreement.

2. Distribution platform and investment

The distribution platform covers a wide range of platforms, including multiple exchanges that simultaneously act as distribution media. A large part of the publishing platform is located in the security token space.

Well-known security token publishing platforms such as Polymath and Harbor provide publishers with the framework, tools and resources to start security tokens on the blockchain. They are preparing their own securities standardized token contracts (namely ST-20 and R-Token) to achieve automatic compliance and customizable trading parameters to meet regulatory requirements. In addition, they also integrate with service providers such as brokers and legal persons to assist issuers in issuing. The dual exchange/distribution platform includes tZERO with overstocked inventory.

As more and more participants enter the open financial world and provide growth for the DeFi ecosystem, the importance of distribution platforms and investment management systems may grow rapidly.

3. Decentralized forecasting platform

Forecasting market has long been a popular financial tool to avoid risks and speculate on global events. Decentralized forecasting market can achieve the same function, but with cryptocurrency, the market cannot be audited. Augur provides everything from political and weather forecasting to dealing with financial risks or adverse events in reality.

4. Exchanges and open markets

The function of exchange is realized by decentralizing exchange (DEX). DEX is a P2P market for assets on the Ethereum between the two parties, and there is no third party as an intermediary for the transaction. Therefore, they are different from centralized exchanges such as Bitcoin base companies in this respect. Some DEX also use some highly innovative token exchange methods, such as atomic exchange and other non-storage methods, to exchange one asset for another with minimum settlement time and risk.

Other types of open markets focus on irreplaceable tokens (NFT), and exchanges are often called cryptocurrency collections. Platforms such as OpenSea and Rarebits can promote the search and purchase/sale of cryptocurrency assets, from NFT in games such as Cryptokitties to virtual plots in distributed games. Some people even say that some markets, such as District0X, allow users to create their own exchanges and vote on management programs. Current examples of dex providing cryptocurrency transactions include coins DEX and EtherDelta.

Step 5 stabilize the currency

Now, there are many models to stabilize coins. They are different in the way of issuing coins, checking reserves and pricing mechanism. Stable coins are tokens issued by the blockchain to keep the currency stable. It is usually linked to dollars, gold or other external assets to achieve this goal. Generally speaking, stable coins can be divided into the following three categories:

Cryptographic currency pledge legal tender pledge non-pledged cryptographic currency pledge stable currency including banker's wear. However, the stable currency backed by legal tender is by far the most popular stable currency in the market. Tethers come first, although there are many alternatives now. The models of these stable coins are not much different from each other. Nevertheless, users must trust the provider. Some provide regular and voluntary audits to build the necessary trust through transparency.

There is no pledged stable currency, neither centralized nor cryptocurrency asset support. They are based on algorithms to keep stable values. In short, the algorithm takes supply and demand as parameters and makes corresponding adjustments to maintain balance. The foundation was a pioneer in this field, but it failed due to regulatory considerations. As a result, the project was abandoned.

DeFi's future-what is its potential? Of course, the final question is, what is the potential of the whole DeFi movement? Basically, there are many things in the field of cryptocurrency that are simply exaggerated. The incalculable potential belongs to the vision, so the actual product has no chance to meet the exaggerated expectations. Then there is serious disillusionment and boredom. But compared with DeFi, it is different, because there are already some finished products, such as MakerDao, which have been well accepted by the market.

However, we are still in the early stage of the whole DeFi movement. However, the potential behind it is enormous. Even if only a small part of DeFi (such as lending) succeeds in the future, it will be more than enough. If the DeFi ecosystem can provide better conditional loans than most national banks and other lending institutions, it may lead to global adoption.

But this is also one of the biggest obstacles that we must overcome in the field of DeFi. On the one hand, more education is needed so that the public can even know the existence of this alternative method. As before, only a few people are worried about issues related to cryptocurrency and blockchain technology. In particular, there are even fewer people dealing with the DeFi department, and they have never even heard of it. On the other hand, the user-friendliness of such products must be greatly improved, thus paving the way for the public to use the product and adopt it globally.