Decentralized finance, the English name Decentralized Finance (DeFi) is an open source technology, which is characterized by the realization of a financial system without a central institution, thereby improving the existing financial system in all aspects.
At present, in all walks of life, the centralized model is still the mainstream of the world. For example, Facebook, Youtube, QQ, WeChat, etc., to use these software, users must rely on a centralized entity, because these entities own and can operate the software.
Similarly, in the existing financial system, many operations need to be achieved through financial institutions as a medium. In the course of operation, these financial institutions often charge certain fees. For example, cross-border remittances, stock transactions, etc., users often cannot avoid banks and brokers.
On the other hand, DeFi (decentralized finance) can directly realize the non-intermediation of both parties to the transaction, and the dual-issue can directly complete the transaction process, and financial institutions no longer provide services between traders.
Not only in finance, market forecasting (Augur), to games (CryptoKitties), and then to lending (Dharma Protocol), there have been many application cases for decentralized applications. The commonality between these decentralized applications is that by introducing decentralized network architecture, such as blockchain and other related technologies, disintermediation is achieved.
Technically, DeFi (decentralized finance) applications are a subset of Dapp (decentralized applications). Decentralized applications or DApps are applications that run on a peer-to-peer network instead of on a single computer. The key advantage of this is that users no longer rely on a central computer to send and receive information. While saving users from fees charged by financial institutions, the transparency and security of transactions have been greatly improved.
Just like there are many different decentralized applications, there are also many different decentralized financial applications, including payments, lending, stablecoins, tokenization, decentralized exchanges, etc.
Payment-Counterparty is a protocol that allows any individual to use the Bitcoin blockchain to create and trade his own digital token. Payment-type decentralized financial applications generally have their own digital currencies, users can use them for transactions, and also provide wallet addresses for users to hold these digital currencies.
Lending-Decentralized lending is a core application that attempts to decentralize the economy. Unlike now, people have to go to banks to obtain mortgages. The goal of decentralized lending is to allow people to obtain loans from more fund lenders and democratize the entire lending process. An example of decentralized finance that is currently being tried in the lending field is agreement. It is built on the Ethereum blockchain and Dharma allows participants to borrow and borrow different forms of mortgage bonds.
Stable currency-Stable currency is an asset with price stability characteristics, so it is suitable for functions such as transaction media, accounting units and value storage. Compared with digital assets such as Bitcoin, Ethereum and other volatile digital assets, stablecoins have received more and more attention in the field of digital assets because of their price stability. Tether is the first stable currency to be released, and each USDT is backed by a dollar reserve. However, due to doubts about USDT's solvency, stable coins such as MakerDAO, GUSD and USDC have appeared on the market.
Tokenization-Tokenization uses blockchain technology to digitize real-world goods or services. STOs digitize the ownership of financial assets such as stocks or bonds. Harbor is a decentralized financial project that uses R-Token to make securities issuance and trading more convenient. R-Token is an ERC-20 token created on the Ethereum platform.
Decentralized exchanges-Decentralized exchanges allow users to trade digital assets such as Bitcoin and Ethereum. Decentralized exchanges were created to solve the problems of centralized exchanges. In centralized exchanges, users do not have their own private keys, so they cannot control their own property.
In a centralized financial system, there are two core problems that have not been effectively resolved:
DeFi (decentralized finance) application aims to solve two main problems that cannot be solved by centralized services: unequal financial services and financial review.
Unequal financial services-This mainly refers to individuals’ access to financial services such as loans, mortgages and insurance. Those who have difficulty or no access to financial services are often referred to as "unbanked" ("unbanked"). Decentralized financial applications aim to improve this problem and ensure that people can use these applications without barriers; all that is needed is a smartphone and an Internet connection.
Financial review-for specific interests, the government, financial institutions or third-party institutions will close the accounts of individuals or companies and restrict their transactions. For example, if a company dares to publicly express disagreements on government policies, the government can restrict the company’s access to basic financial services, thereby keeping them silent. Take bank account services as an example. Companies need to pay employees and other expenses through bank accounts. Without these services, the company will go bankrupt. On the contrary, because DeFi is inherently decentralized, there is no way to censor who is using it. Taking lending as an example, if a financial institution wants to review a person, they can reject his/her loan application to restrict his/her access to credit. However, with a decentralized lending agreement such as Dharma, individuals no longer rely on a financial institution to obtain loans, instead they will receive the services of lenders throughout the world.
Nowadays, with continuous attempts in DeFi technology, more decentralized projects and protocols are also under continuous development and improvement. The battle between DeFi and traditional financial models is about to begin.
In the future, the existence of a decentralized financial world will continue to provide democracy and agency for the value of users, and make the cryptocurrency market more stable and accessible. This means that consumers, merchants, investors and institutions can all use it. Innovation is making DeFi a real-world use case, providing the technology with the means and potential to influence the world.