1. What is DeFi?
DeFi is the abbreviation of Decentralized Finance (decentralized finance), also known as Open Finance. It actually refers to a decentralized protocol used to build an open financial system, which aims to allow anyone in the world to conduct financial activities anytime, anywhere.
In the existing financial system, financial services are mainly controlled and regulated by the central system, whether it is the most basic deposit and withdrawal transfers, loans or derivatives transactions. DeFi hopes to establish a transparent, accessible, and inclusive peer-to-peer financial system through a distributed open source agreement to minimize trust risks and allow participants to obtain financing more easily and conveniently.
Second, the difference between DeFi and traditional financial systems
Compared with the traditional centralized financial system, the DeFi platform has three advantages: a. Individuals with asset management needs do not need to trust any intermediary. New trust is rebuilt on the machine and code; b. Everyone has access rights, no one Have central control; c. All agreements are open source, so anyone can cooperate on the agreement to build new financial products and accelerate financial innovation under the network effect; DeFi is a relatively broad concept, including: currency Issuance, currency transactions, lending, asset transactions, investment and financing, etc.;
3. Advantages over traditional mortgage lending
1. Fast lending speed The logic of encrypted lending is similar to equity pledged loans, with high asset liquidity and easy realization. For borrowers, the amount of credit loans is limited, the process of mortgage loan and car loan is complicated, and the economic cost and time cost are high. The digital currency can be completed in a short time according to the process. 2. The difficulty of risk control is low. Traditional car loan and housing loan, the first thing facing the platform risk control is to verify the truth. Digital currency is a better trading category that can be traded 24 hours a day. It is very standardized and almost not. It may be faked, and the entire process can be executed openly and transparently through smart contracts. 3. Low cost of default execution In the field of traditional lending, if users default, there will be high execution costs. For example, using real estate mortgage loans, going through legal execution procedures is very time-consuming and has many variables. The digital currency pledged lending can be performed openly and transparently through smart contracts, which is not only convenient but also safer. In addition, the digital currency is mortgaged. Even if the user defaults, the platform can also obtain benefits by selling digital currency.
Fourth, the lending model in DeFi
At present, all kinds of lending platforms in DeFi are basically in the mode of mortgage loans. The overall mode is more inclined to the pawnshop mode, turning various digital currencies into fixed-value goods, and goods with a mortgage value of 100 get liquid currencies at a price of 75. The act of obtaining currency through currency collateral seems very stupid, but the high mortgage interest rate and the huge early-stage yield of the DeFi market attract higher market funds.
The main market needs of DeFi lending are as follows:
1. Satisfy the funding needs of trading activities: including trading activities such as arbitrage, leverage, and market making, this is the most important rigid demand. For example, over-the-counter service providers or market makers need to borrow funds to satisfy a large number of transactions. Traders increase leverage by borrowing or borrowing assets to sell short for arbitrage. 2. Obtain passive income: that is, investors who want to hold encrypted assets for a long time and hope to generate additional income.
3. Satisfy the funding needs of the token economic activity of liquid mining.
4. Obtain a certain amount of liquidity: This is mainly for the short-term liquidity needs of miners or start-ups in some industries. This is more in line with the logic of traditional lending business.
But unlike traditional lending, which lends money to people who need it more, we see that DeFi lending is currently more of an arbitrage game where a user provides loan funds to the market, then borrows it himself, and then It seems silly to take the borrowed money for mortgage lending, so that it goes back and forth, but users can get multiple benefits with a single fund.
DeFi has achieved great success in the field of lending. Some people say that so far, there have been two matches between products and markets in the history of encryption, one is Bitcoin and the other is DeFi. Although DeFi is still very small, according to its current development trend of "Currency Lego", 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 and worthy of further exploration. field of.