Why is DeFi the second breakthrough in the history of encryption?

Original title: "why is DeFi the second breakthrough in encryption?"

Blue fox notes

If you start with bitcoin, blockchain has been developing for more than a decade. In addition to the bitcoin shock, the latest real turning point for blockchain is the emergence of a smart contract platform. Smart contract platforms have brought new species, most important now in finance and gaming.

The game mainly focuses on non-homogeneous tokens, which has been discussed by blue fox notes before. In the future, a large value field will be formed around the generation and transaction of non-homogeneous tokens, which is still in the initial stage, but the trading market has stabilized. The financial aspect is mainly DeFi. There has been a lot of feedback from readers of the blue fox notes recently. DeFi is a bit complicated, but it's interesting to know what DeFi is. Today, the blue fox notes briefly read DeFi.

What is DeFi?

Before we understand the importance of DeFi, let's understand what DeFi is. It comes from decentralized finance in English, DeFi is the abbreviation of the phrase, if translated literally, "decentralized finance". In practice, however, it is more appropriate to call it "distributed finance" or "open finance" because, in essence, there is no complete "decentralized" finance, most of which is a combination of varying degrees of centralization and decentralization. However, DeFi is a convention that is more suitable for propagation.

So specifically, what is DeFi? It generally refers to cryptoassets, financial smart contracts, and protocols built on smart contract platforms such as ethereum. These assets, smart contracts and agreements can be combined like lego, hence the name "currency lego".

DeFi is the second breakthrough in the history of encryption

The first breakthrough in the history of cryptography was bitcoin, which achieved value transfer without the participation of third parties through the proper application of cryptography, consensus mechanism, peer-to-peer network, incentive mechanism and so on. So far, it has basically realized the primary stage of value storage and transfer, which is the most dazzling and successful breakthrough in the history of encryption.

DeFi is a second breakthrough. It hasn't yet reached the heights of bitcoin, but it's starting to take shape and has the potential to grow.

Why is DeFi the second breakthrough in the history of encryption

To understand DeFi, first understand why it exists. It exists because it can meet the financial needs of some people that traditional finance cannot meet.

   Opaque financial and economic crises

The core object of finance is money. But the money is the human society in the development process produces spontaneously, is not inborn. Humans started bartering, but the biggest problem with bartering was that it was inefficient, because it was hard to find two people who had exactly what they wanted, a fisherman who needed shoes and a shoemaker who needed grain.

Even if the demand matches, how many pounds of fish can a pair of shoes change? Pricing is another problem. So, the demand for money came up, people needed a currency to exchange between different things, and that currency became the medium of exchange, and it could store value, and what could not buy 10 fish today could only buy one fish tomorrow.

In human history, there were shells, precious metals, gold and silver, and so on. Through the integration and operation of intermediary institutions, traditional finance improves the efficiency of the market and achieves better resource allocation. But at the same time, because of the existence of intermediary institutions, the traditional financial system has also produced many problems, such as opacity, excessive hair and so on. This leads to excessive debt and excessive inflation. Once the economic development is stagnant or the economic distribution is excessively uneven, and the debt structure is not timely digested, it is easy to break out the economic crisis.

In the current intermediation dominated financial structure, the economic crisis seems to be hard to avoid, repeat. The core of blockchain is transparency and distribution, which gives it the opportunity to change the status quo of the current financial structure. This is the key to why DeFi will be useful in the future.

·   DeFi is different

So far, DeFi is far from a success, and even compared to bitcoin's breakthrough, it's still rudimentary. It is a fraction of the size of traditional finance. But why is it important?

DeFi's goal is to build a transparent financial system that is open to all, without permission, and without relying on third parties to meet the needs of finance. Such as borrowing, trading, payments and derivatives.

It is open finance, which is also brought by the infrastructure of blockchain, and is also inspired by bitcoin. Its most important features are verifiability and transparency. With blockchain, people can verify every transaction that happens on it, which also leads to transparency.

·   DeFi is currency lego

With basic lego modules, everyone can assemble different things according to their needs. The same is true for smart contracts in DeFi. Through a variety of assets, contracts, and agreements, new projects can be assembled to provide users with new products and services.

For example, Compound is a market for loans based on ethereum. In this market, ETH can be lent, Dai, a stable currency generated by MakerDAO, and USDC, a stable currency generated by us dollars, can be lent. When the user provides Dai to the Compound, the user can receive the cDai token. The cDai represents the user's Dai and the interest it generates.

The cDai itself is also a token, which means two things. One is that the cDai can circulate in the market, and the holder can get a benefit. For example, if you trade the cDai with ETH through Dex such as Uniswap and hold the cDai, then you can get the benefit of the cDai. Second, it can be used by other smart contracts, such as cDai, which can be used by Uniswap. Dai tokens can be generated by mortgaging ETH or BAT on MakerDAO, while Dai can be Compound to generate cDai, which can be exchanged with other tokens on uniswap. This is a simple example of currency lego.

   DeFi is a parallel world of traditional finance

Traditional finance has the advantage of intermediary and obtains the trust of many people through service. This can meet the needs of a large number of people in the real world. And there are people in this world who want to take control of financial services themselves. This is also the key to the existence of DeFi. To serve these people, DeFi is building a parallel world to traditional finance.

Compound, Dharma, Maker, etc., provide lending services for encrypted assets, similar to the encrypted version of a traditional bank, known as DeFi bank. Programs like Uniswap, Kyber, Bancor and others offer exchanges for assets, like the nasdaq and nyse of the traditional financial world, which are DeFi's version of exchanges that can be exchanged for encrypted assets and wallets.

·   DeFi is more than a parallel universe of traditional finance

DeFi is not only a mapping of traditional finance to the cryptographic world, it also takes on new characteristics. For example, it allows quick conversions through pools of capital; Its lending rates can be adjusted instantly, it can be added or removed at any time, and it has no lending terms for traditional loans. For another example, the loan income is reflected by the token, and if the user buys the token, essentially he can also enjoy the loan income of the token, which is equivalent to the debt scrip conversion and circulation, which greatly accelerates the liquidity of assets. DeFi's lack of license and transparency is beyond the reach of traditional finance.

Since DeFi is a series of smart contracts that users interact with on the block chain, people can benefit from its transparency and non-licensing features, such as DEX aggregation for optimal price trading; Achieve the best interest yield by aggregating loan agreements.

Lending business look, DeFi's current lending needs to be over-collateralized in order to lend. Since all lending and clearing is enforced by agreement, there is no fear of default and no third party involvement. At the same time, lenders get higher yields and borrowers get better rates by eliminating the middleman.

DeFi is not without risk, of course, and that is where it falls short of conventional finance. Although traditional Banks are also at risk of failure, they are relatively stable and predictable. DeFi projects may face black swan events, such as cryptographic assets falling rapidly in a short period of time, resulting in late liquidation and the risk of collapse; In addition, if there are vulnerabilities in the code, it may lead to the risk of hacker attacks.

   Integration of DeFi and traditional finance

For now, DeFi is a requirement for some, not all. Not everyone has the ability and willingness to manage encrypted assets. It is more likely that DeFi and traditional finance form a fusion, each with its own user groups. Traditional finance can use the features of DeFi to achieve liquidity, while DeFi can use assets and compliance of traditional finance to achieve scale expansion.

USDC is an example of the combination of DeFi and traditional finance. Currently, USDC's lending business in DeFi is second only to ETH and even more than Dai. USDC imports the currency of the traditional world into DeFi to form a stable currency, which then functions through DeFi's permission-free, fast-moving, transparent and other features.

Traditional financial demand has its historical inertia, from today, DeFi without the participation of traditional financial is difficult to expand, although this is a lot of idealists and geeks don't want to see, but in the real world can be a place for DeFi play a biggest role is to help the traditional financial through block chain without permission and rapid circulation faster flow of the assets, to make a lot of new curing of original assets.

Even Dai cannot be 100% decentralized because its security requires the governance of the MKR token holder and the prevention of cyberattacks on it, all of which require some degree of centralization to maintain security.

DeFi itself is open finance, a new form that can take full advantage of the transparency, openness, tamperability and mediation-free nature of the blockchain, rather than exclude the traditional financial world. If the two can find a way to merge, a whole new species will be created.

This will become increasingly apparent as real-world assets flow through DeFi. For example, if you buy 100% of the tokens of a house, but the house involves many legal rights and obligations in reality, you cannot automatically obtain all the rights and interests just by token transfer, which requires the help of traditional law enforcement to resolve disputes.

·   DeFi and smart contract platform

The majority of current DeFi projects are built on ethereum chains, most importantly because of the security, underlying asset value, and developer ecosystem support of ethereum blockchain builds.

The DeFi project is currency lego, and it needs to have a good foundation. While bitcoin may be the most valuable currency, it can't be as flexible as ethereum and build smart contracts with complex logic.

Ethereum's market cap gives it security, and it's a smart contract platform, which gives DeFi a foothold on ethereum. This is also evident from the current major DeFi projects.

Of course, does that mean the other chains don't have a chance? Not necessarily. It's up to you. The core logic here is not TPS, but security. Therefore, if other chains are to achieve or even exceed the DeFi of ethereum, the first thing to do is to achieve the security of the chain, one of the core preconditions is to increase the value scale of the chain. Looking forward to DeFi in full bloom.

·   DeFi's participation and user habits

Since DeFi is not licensed, it means that anyone with cryptographic assets can participate in DeFi. For example, if a user owns assets such as Dai, USDC, ETH, etc., the encrypted assets can be deposited into the DeFi project for interest. These are usually done through operations on the chain, without the participation of a third party, and users have great freedom of participation, convenience and speed.

Currently, DeFi allows people to borrow, trade, pay, and futures, but for most common USES without experience with encrypted wallets, it has a threshold. It requires the user to have some ability and experience in managing assets.

However, as more DeFi projects simplify their operations and become easier to use, it becomes progressively easier to use once people use DeFi products. Once the usage habit is established, more and more people will enter the DeFi domain.

DeFi project status

· From loans and DEX to derivatives

Current DeFi project involves borrowing, DEX, financial derivatives, such as business, according to the writer lock encryption asset scale, lock encryption to reach $686 million in total assets, including locking of the ETH nearly 2.7 million, BTC1400, DAI more than $2200, has been running project hundred, locking assets of more than $1 million project to 16.

These 16 projects are also current major DeFi projects, including MakerDAO, Synthetix, Compound, InstaDApp, Uniswap, dYdX, Nuo Network, Lightning Network, Bancor, WBTC, Kyber, bZx, Nexus Mutual, Set Protocol, DDEX, Dharma.

   DeFi three small giants

Based on the value of the currently locked assets, MakerDAO, Synthetix, and Compound currently (at the time of writing) have $329 million, $176 million, and $99.6 million, respectively.

But the DeFi landscape is far from certain, with new smart contract platforms coming on board and new projects emerging, the field is just beginning. Therefore, the so-called "three giants" are only temporary leaders, and more projects will emerge in the future.

conclusion

DeFi will go into the history books of encryption because it truly matches the product to the market. So far, there have been two product and market matches in the history of cryptography: bitcoin and DeFi. Although DeFi is still small, the current trend of its "currency lego" is to try to both build a parallel to traditional finance and integrate new features with traditional finance, which is an interesting area to explore further.

Text link:https://mp.weixin.qq.com/s/qBkL73UdSaD7TBFPuGs6lA

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