Editor's Note: This article comes fromBlue Fox Notes (ID: lanhubiji), reprinted by Odaily with authorization.
Editor's Note: This article comes from
, reprinted by Odaily with authorization.
What is DeFi?
If counting from Bitcoin, blockchain has been developed for more than ten years. In addition to the earth-shattering of Bitcoin, the latest real turning point of the blockchain is the birth of the smart contract platform. The smart contract platform has brought new species, the most important ones are financial and gaming.
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What is DeFi?
Before understanding the importance of DeFi, let's first understand what DeFi is. It comes from the decentralized finance in English, DeFi is the abbreviation of this phrase, if the literal translation is "decentralized finance". But in fact, it is more appropriate to call it "distributed finance" or "open finance", because, in essence, there is no complete "decentralized" finance, and most of them are centralized and decentralized to varying degrees combination. However, DeFi has become a common practice and is more suitable for communication.
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DeFi is the second breakthrough in the history of crypto
The first breakthrough in the history of encryption is Bitcoin. Through the appropriate application of cryptography, consensus mechanism, peer-to-peer network, and incentive mechanism, it has completed the value transfer without the participation of a third party. From the current point of view, it has basically realized the initial stage of value storage and transfer, which is the most dazzling and successful first breakthrough in the history of encryption.
And DeFi can be regarded as the second breakthrough. Although it has not yet reached the height of Bitcoin, it has begun to take shape and has the potential to grow.
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Why DeFi will be the second breakthrough in the history of encryption
To understand DeFi, you must first understand why it exists. It exists because it meets financial needs of some people that cannot be met by traditional finance.
Opaque financial and economic crisis
The core object of finance is money. Currency is spontaneously produced during the development of human society, not inherent. The original exchange of human beings is barter, but the biggest problem with barter is inefficiency, because it is difficult to find two people who happen to have items that match their needs, a fisherman who needs shoes and a shoemaker who needs grain It is difficult to strike a deal between them.
Even if the demand matches, how many catties of fish can be exchanged for a pair of shoes? How to calculate the price is another question. Therefore, the demand for currency has emerged. People need a currency to exchange between different items. This currency becomes a medium of exchange and can also store value. The currency that can buy 10 fish today can only buy 1 fish tomorrow. up.
In the history of mankind, there have been currencies such as shells, precious metals, gold and silver, and today they are legal currency. Through the integration and operation of intermediaries, traditional finance has improved the efficiency of the market and achieved better resource allocation. But at the same time, due to the existence of intermediaries, the traditional financial system also has many problems, such as opacity and spam. This leads to excessive debt and excessive inflation. Once the economic development stagnates or the economic distribution is excessively uneven, and the debt structure is not digested in time, an economic crisis will easily break out.
However, in the current financial structure dominated by intermediation, economic crises seem to be unavoidable and repeated. The core of the blockchain is transparency and distribution, which leads to it having the opportunity to change the status quo of the current financial structure. This is the key to why DeFi can play a role in the future.
DeFi is different
So far, DeFi has been far from successful, and even rudimentary compared to the breakthroughs achieved by Bitcoin. Compared with traditional finance, its magnitude is not even a drop in the bucket. But why would it matter?
The goal of DeFi is to build a transparent financial system that is open to everyone, without permission, and without relying on third-party institutions to complete financial needs. Such as lending, trading, payment and derivatives.
It is open finance, which is also brought about by the infrastructure of the blockchain, and it is also inspired by Bitcoin. Its most important features are verifiability and transparency. Through the blockchain, people can verify every transaction that happens on it, which also brings transparency.
DeFi is currency Lego
With basic LEGO blocks, everyone can build something different according to their needs. The same goes for smart contracts in DeFi. Through various assets, contracts and agreements, new projects can be assembled to provide users with new products and services.
Compound, for example, is an Ethereum-based lending market. In this market, you can borrow ETH, you can also borrow the stable currency Dai generated by MakerDAO, and you can also borrow the stable currency USDC generated by US dollar collateral. When users provide Dai to Compound, users can receive cDai tokens. cDai represents the user's Dai and the interest it generates.
cDai itself is also a token, which means two things, one is that cDai can circulate in the market, and holders can get benefits. For example, if you trade cDai with ETH through Dex such as Uniswap and hold cDai, then you can get the income of cDai. Second, it can be used by other smart contracts, for example, cDai can be used by Uniswap. Mortgage ETH or BAT on MakerDAO can generate Dai tokens, and putting Dai into Compound can generate cDai, and cDai 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 its advantages as an intermediary, and has won the trust of many people through its services. This can meet the needs of most people in the real world. In this world, there are still some people who want to control financial services by themselves. This is also the key to the existence of DeFi. In order to serve these people, DeFi is building a world parallel to traditional finance.
For example, Compound, Dharma, Maker, etc. are providing lending services for encrypted assets, which is similar to the encrypted version of traditional banks, that is, DeFi banks. Projects such as Uniswap, Kyber, and Bancor provide asset exchange services, similar to exchanges such as Nasdaq and the New York Stock Exchange in the traditional financial world. They are DeFi versions of exchanges, and they can be exchanged as long as they have encrypted assets and wallets.
DeFi is not just a parallel world of traditional finance
DeFi is not only the reflection of traditional finance in the encrypted world, but also presents new features. For example, it realizes fast exchange through the fund pool; its lending rate can be adjusted instantly, and it can be joined or withdrawn at any time, and there is no borrowing period of traditional lending, etc. For another example, its loan income is reflected by its token, and if the user purchases the token, he can essentially enjoy the loan income of the token, which is equivalent to tokenizing the debt and realizing circulation. Greatly accelerated the liquidity of assets. The permissionlessness and transparency of DeFi are beyond the reach of traditional finance.
Since DeFi is where users interact with a series of smart contracts on the blockchain, people can take advantage of its transparency and permissionless features, such as achieving the best price transactions through the aggregation of DEX; achieving the best price through the aggregation of lending agreements interest income.
In terms of lending business, DeFi's current lending requires over-collateralization to realize lending. Since all lending and liquidation processes are enforced by the agreement, there is no need to worry about breach of contract, and no third party is required to participate. At the same time, due to the omission of intermediate links, lenders can obtain higher returns and borrowers can obtain better interest rates.
Of course, DeFi is not without risks, which is also its shortcoming compared to traditional finance. Although traditional banks also have bankruptcy risks, they are relatively stable and predictable. DeFi projects may face black swan events, such as the rapid decline of encrypted assets in a short period of time, resulting in the risk of collapse due to lack of time for liquidation; in addition, if the code has loopholes, it may lead to the risk of hacker attacks, etc.
The fusion of DeFi and traditional finance
At present, DeFi is the demand of some people, not everyone's demand. Not everyone has the ability and willingness to manage encrypted assets. A more likely scenario is that DeFi and traditional finance are integrated, and each has a user base. Traditional finance can use the characteristics of DeFi to achieve liquidity, and DeFi can use traditional financial assets, compliance, etc. to achieve scale expansion.
USDC is a case of the combination of DeFi and traditional finance. The current USDC lending business volume in DeFi is second only to ETH, even surpassing Dai. USDC imports the currencies of the traditional world into DeFi to form a stable currency, and then uses DeFi's permissionless, fast circulation, and transparency to play its role.
Traditional financial needs have their historical inertia. From today’s point of view, it is difficult for DeFi to expand without the participation of traditional finance. Although this is what many idealists and geeks do not want to see, in the real world, DeFi can be used to its full potential. The biggest role is to help traditional finance realize the faster flow of assets through the permissionless and fast circulation of the blockchain, so that many originally solidified assets can be reborn.
Even Dai cannot be decentralized with 100% purity, because its security requires the governance of MKR token holders, the need to prevent oracle attacks on it, etc., all of which require a certain degree of centralization to maintain Safety.
DeFi itself is open finance and a new form. It can make full use of the transparent, open, non-tamperable and intermediary-free features of the blockchain without excluding the traditional financial world. If the two can find a way to integrate, a new species will emerge.
This will become more and more apparent as real-world assets circulate on DeFi. For example, if you buy 100% of the tokens of a certain house, but the house involves many legal rights and obligations in reality, you cannot automatically obtain all the rights and interests just through the transfer of tokens, which requires traditional legal enforcement to resolve disputes.
DeFi and smart contract platform
Most of the current DeFi projects are based on the Ethereum public chain. The most important reason is that building on the Ethereum blockchain has certain security, underlying asset value, and developer ecological support.
DeFi projects are currency Lego, and it needs to have a good foundation. Although Bitcoin has the highest market value, it cannot be as flexible as Ethereum and cannot build smart contracts with complex logic.
The market value of Ethereum gives it security, plus it is a smart contract platform, which leads to the development of DeFi on Ethereum. This can also be seen from the current main projects of DeFi.
DeFi participation and user habits
Since DeFi is permissionless, it means that anyone with encrypted assets can participate in DeFi. For example, if a user owns assets such as Dai, USDC, ETH, etc., he can deposit encrypted assets into DeFi projects to obtain interest income. These are usually done through operations on the chain without third-party participation, and users have great freedom, convenience and speed of participation.
At present, through DeFi, people can realize businesses such as lending, trading, payment, and futures, but for most ordinary users who have no experience in using encrypted wallets, it has certain thresholds. It requires users to have certain ability and experience in asset management.
However, as more and more DeFi projects simplify their operating procedures, the use becomes easier and easier. Once people use DeFi products, the difficulty of using them will gradually decrease. Once a usage habit is formed, more and more people will enter the DeFi field.
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Current status of DeFi projects
From Lending, DEX to Derivatives
These 16 projects are also the current main projects of DeFi, including MakerDAO, Synthetix, Compound, InstaDApp, Uniswap, dYdX, Nuo Network, Lightning Network, Bancor, WBTC, Kyber, bZx, Nexus Mutual, Set Protocol, DDEX, Dharma.
epilogue
DeFi three small giants
