What is DeFi? What does its arrival mean?

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Since the beginning of 2019, DeFi has become a long-term hot topic in the blockchain field. Looking back at this year, DeFi’s development has had a great impact on blockchain ecology and financial markets. So what is the DeFi and what does its arrival mean?

Before we understand the importance of DeFi, let’s first understand what DeFi is. It comes from the word decentralized finance, DeFi being the acronym of this phrase, which translates to 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, most of which are the combination of decentralization and decentralization to varying degrees. But DeFi is established and more suitable for dissemination.

So what is the DeFi specifically? It generally refers to crypto assets, financial smart contracts and protocols built on smart contract platforms (such as Ethereum). These assets, smart contracts, and protocols can be put together like Lego, hence the nickname “monetary Lego”.

The essence of finance can be boiled down to: the exchange of utility and risk in time and space. In theory, all the services and products offered by decentralized finance are the same as in the traditional financial world. In the traditional financial system, financial services, including financing investment, savings, credit, settlement, securities trading, commercial insurance and financial information consulting, are provided by centralized financial institutions for users. However, DeFi uses distributed ledger technology, including blockchain, cryptocurrencies, smart contracts, to provide services such as loans, financing, stablecoins and credit facilities.

DeFi Features:

1. Interoperable

The current financial system consists of walled gardens with limited transferability or two-way access. Where interoperability is possible, it is controlled by middlemen and rent-seekers. Open finance is defined by platforms that can work together and complement each other with a degree of transparency. This helps to strengthen the compounding effect of all our projects as a whole.

2. Combinable

For many people, Legos are a favorite childhood toy, and through unlimited imagination, you can create what you want. In DeFi, any idea can be built as long as it is technically feasible. Composability refers to the concept that, like Lego, can be selected and combined in a variety of combinations.

3. Programmable

Bitcoin has completely changed the definition of money. Ethereum enables new financial instruments and assets that are more customizable than existing products and services. Digital assets and securities will usher in a new era of financial mechanisms and growth.

4. Barrier-free and inclusive

In traditional centralized finance, users must go through a financial institution to obtain services and accept complex terms from the financial institution. Whether and when the service can be completed depends on the efficiency and security of the financial institution. DeFi, on the other hand, is open to anyone who can connect to the Internet, while greatly reducing costs, creating a world where value flows freely and breaking the constraints of geography.

DeFi products enable people around the world to participate in financial activities (such as spending, borrowing, lending, gambling and trading) in a peer-to-peer manner without relying on intermediaries such as banks and governments.

How does the DeFi work?

The DeFi solution is powered by blockchain technology, using the most powerful features of the technology: programmable digital assets, such as Bitcoin (BTC) and Ethereum (ETH). These digital assets have a monetary value, mainly because of their store of value properties. Because these assets are programmable, we can lock them into smart contracts and use them as collateral (similar to a mortgage on a home).

We can also do all sorts of interesting things with provable lock values. With this collateral, loans are made in the form of so-called stablecoins. Stablecoins are digital currencies whose value is pegged to world currencies such as the U.S. dollar. We can swap these stable assets for other digital assets and spend them on the Internet, or lend them to loan agreements to earn interest. You can do more advanced things beyond the range of financial products that we know today.

The idea is that digital reserve assets are being used as collateral against fully digital and disintermediated innovative financial products. You can interact directly with the code anytime, anywhere, without the need for an intermediary, which is a typical shift.

Impact of DeFi:

DeFi is a highly competitive corporate capital allocation model that reduces barriers to market entry while raising the efficiency of competition among market participants to a new level.

DeFi will increase the intensity of competition and promote healthy competition, thus improving market efficiency. DeFi allows financial services to be based in a relatively transparent world where information at the market level is transparent to all participants, which creates a sense of trust while making it possible to achieve market efficiency. At the same time, through blockchain encryption technology, personal privacy is also protected, which is beneficial to the market and individuals.

DeFi promises to lead us into the next era of productivity, where every individual is covered, plugged into a complex financial infrastructure and empowered by capital. As you can imagine, it would make a big difference if capital could flow almost frictionless and be deployed almost instantaneously wherever the need for capital is most acute.

DeFi will go down in encryption history because it truly matched the product to the market. So far in crypto history, there have been two product and market matches, Bitcoin and DeFi. Although DeFi is still small, according to the current development trend, it not only tries to build a parallel field with traditional finance, but also tries to combine with traditional finance to achieve new features. This is a very interesting field worth further exploration.

(Author: Warp future Security zone, content from the link to the content open platform “Dede number”; The views expressed here are those of the author and do not represent the official position of ChendE)

What is DeFi? What does its arrival mean?
 

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