What is DeFi?
DeFi stands for decentralized finance, this is a completely new term based on blockchain technology and cryptocurrency, it is predicted to have the potential to become the driving force of an open and horizontal economy. peer to peer.
Financial markets can promote societal well-being by allowing great ideas to become reality, but power in finance is centralized, most people don’t have the power to decide what to do. What is funded and receive only a small portion of the profits from the projects.
More than half of global venture capital (VC) funding goes to startups in the United States, most of which are in Silicon Valley and a few cities like San Francisco, New York, and New York. York. Meanwhile, even in the United States, the lower 80% of society owns only 7% of the shares of companies, and individuals in many other countries do not even have the right to participate in the stock market. Finance is at the heart of the global economy, but it is not an open system.
How does centralized finance work?
The mechanism behind this is that ordinary people transfer control of their assets to banks and other financial intermediaries so that professional managers can work wisely with money in the market. Their logic is that they will earn a higher profit and thus the account holder also benefits.
However, the result is keeping control and risk at the heart of the system. We know that bankers, experienced but can still make mistakes and may not see the risk in the market, as in the 2008 housing bubble. When they control all the money, the risk. accumulate at the center and endanger the entire system.
Satoshi Nakamoto created Bitcoin in 2008 as the first solution of global peer-to-peer commerce without intermediaries, so that individuals can control their assets. However, Bitcoin and early cryptocurrencies only decentralized issuance and storage of money, not access to the financial system.
Two major problems with the current crypto space stand out. First, even though the protocols are decentralized and are based on consensus algorithms, many points of access to the system, like exchanges, are still centralized. In addition, many crypto projects are managed through rather centralized organizations or companies, often lacking transparency or accountability, and do not openly show the development of new parts of the ecosystem. . Therefore, blockchain is not yet open to finance.
Question about access
It is not surprising that areas such as finance and cryptocurrencies, where participants must have a good level of knowledge, are not extended to entire large regions of the world.
However, as the primary role of finance today will change, and blockchain-based finance will likely play a larger role in the future of global economies. Diversity helps decision-making, and we could have avoided a lot of tax controversy if the current financial system had been fairer and more open from the start.
Many new-age fintech companies and banks promise to give consumers more control. These are false promises because in most cases banks still manage the assets and customers have to trust the bank to take good care of them. They are faster and more convenient, but not fundamentally different from the old bank.
Real disruption is only accompanied by a complete loss of control by the individual over the asset. Many developers are creating innovative financial products towards open source protocols for exchanging assets through decentralized platforms. The new platform has two major financial advantages as it exists today.
First, individuals will be able to unlock multiple forms while not having to trust any intermediaries looking after their assets to receive commissions. Anyone has access and there is no central control.
Second, all protocols are open source, so anyone can build new financial products on top of them and people from all over the world can collaborate and launch new financial products. new value creation. This can lead to faster innovation and strong network effects as more users and builders move to the platform.
Decentralized finance, or DeFi, has provided a wide range of popular financial means and markets to ensure that individuals are the sole custodian of their assets at all times.
Cryptocurrencies are very volatile. Price swings are a big deal if you want to use cryptocurrencies for anything from buying goods to transferring money across borders, to borrowing and lending or hedging transactions.
Stablecoins end price uncertainty.
Stablecoins are programmed store of value that the network can peck to any other value in the world.
Most stablecoins hold the value of the US dollar, which is the main currency in international trade, but they could theoretically represent any real value, such as fiat currencies. or other commodity prices.
There are two versions of stablecoins that are asset-backed and decentralized.
As with other aspects of the crypto world, some issuers have created centralized versions. A single administrator oversees the issuance of asset-backed stablecoins and ensures that issuers have enough physical assets, such as fiat money, as collateral to secure the value of their assets. coin.
Cente, an escrow of Coinbase and other institutions, allows USDCoin issuers to comply with stringent US regulations and ‘provide monthly published proof of reserves corroborated by auditors. certified independents’. It’s basically USDC and Coinbase trying to be a central bank.
Asset-backed stablecoins are equivalent to the money-issuing system we have today with a different technology for trading.
Just like centralized exchanges, centralized stablecoins do not represent the spirit of decentralized finance as they provide centralized control over the coin. They do not open access and control of a stable store of value to more people.
A case in point is the controversy surrounding Tether, another asset-backed stablecoin. Some researchers have found evidence that the organization behind Tether manipulated the Bitcoin price back in late 2017.
Another study has somewhat disproved the evidence, but manipulation through centralized agencies is entirely possible. If confirmed, they will wreck the entire crypto space.
We need another solution.
Decentralized Stabecoin: DAI
MakerDAO has created a decentralized mechanism to stabilize the value of a coin around the value of the US Dollar without any central control.
Its stablecoin is called Dai, and it uses market mechanisms to stabilize value instead of a central issuer.
Dai is a freely tradable ERC20 token, which means it is based on the Ethereum blockchain. Anyone with an Ethereum wallet can own and exchange it on exchanges without any middlemen. There is no controlling authority over it, and so no one can limit its release or pause it.
Just like asset-backed stablecoins, DAI offers instant cross-border transfers with low transaction fees, and merchants can accept it without risk of volatility. Customers have an incentive to spend because its price won’t go up and hindering that means losing value to inflation.
Most users of Dai will simply have to trade or pass it on to partners or merchants, regardless of its value guarantee mechanism.
In the first step, anyone can withdraw Dai corresponding to the collateral of ETH. The process is like taking a loan and requiring the wallet owner to put ETH into WETH, which then becomes pooled ETH, PETH, in a collateralized debt position on CDP.
Wallet owners cannot access ETH in CDP until they repay the DAI loan. The price to buy and pay back DAI loans is always $1 per DAI.
The chart below shows all Dai minted through CDPs and all Dai burned as lenders pay back their Dai loans to unlock access to their collateral. .
Dai holders can trade tokens on exchanges and so the supply and demand of Dai changes, which will lead to price swings. However, if a lot of demand for DAI has driven the price up, a simple mechanism that incentivizes further generation of DAI, and thus an increased supply, could counter upward price pressure.
Conversely, when the supply of Dai is more than the demand and its price falls below $1, Dai holders are able to monetize the debt repayment, which creates a burn of their DAI, and thus reduces the source of funds. supply, pushing prices up again.
In addition to the automatic stabilization mechanism, MakerDAO stands behind Dai and its members can vote to reverse any major changes in the event of a coordinated attack on the network. MakerDAO acts as an emergency aid, but it is not supposed to affect prices in any way.
The best part about the Dai stabilizing mechanism is that it is not only a smooth theory, but also successful in implementation.
Dai’s value to USD has never been broken, while daily trading volume has always been in the millions of USD and the market capitalization has reached around 80 million USD.
The success of a decentralized stablecoin like DAI shows the potential for DeFi to replicate money without central control.
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