DeFi and Stable Coins

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Coinmonks

8 min readFeb 22, 2022

Introduction

Most of us remember 2008 with the great crisis caused by the housing bubble in the United States in 2007 and spreading all over the world a year later, which caused Lehman Brothers, the fourth-largest investment bank in the world, to sink with $613 billion in debt, the FED intervened with cheap liquidity and this liquidity caused inflation. In those years, one more event took place, although it was not taken into account. A white paper was published by the person or persons nicknamed Satoshi Nakamoto. In this white paper, Satoshi Nakamoto stated that this financial crisis was caused by governments providing liquidity around the world and banks distributing this liquidity. The cryptocurrency, which Nakamoto explained in detail in the white paper, aims to decouple incompetent governments and greedy banks by using Bitcoin and making transactions with the P2P (peer-to-peer) method. Bitcoin and blockchain technology, which were the first sparks of this revolution that emerged that day, have revealed DeFi, decentralized finance, which is also the subject of this article with stable coins.

What is DeFi?

The main actors of the crisis in 2008 were the banks and the state that could not control the banks, the debt bubble in the United States financial market caused the housing bond market to collapse and crushed everyone, especially those at the bottom of the pyramid, under the rubble. People lost their jobs, their homes, thanks to this debt bubble. The United States central bank, intervened in the crisis with the cause of the crisis, that is, with the uncontrollable monetary expansion (debt bubble), and tried to control the fire by lighting a fire, and the crisis spread all over the world. That day, people understood that these crises will continue as long as the system is in the hands of major actors. These bitter experiences have revealed decentralized finance. Decentralized finance wants to decentralize the monetary system and move it to a decentralized system through blockchain technology. It wants to give control to software and the smart contracts they control, not individuals or governments. Decentralized finance is currently built on four technologies that we can define as revolutions, namely artificial intelligence, smart contracts, distributed ledger technology, and blockchain.

The role of Artificial Intelligence in DeFi

The problems and crises that could occur in the financial system will be been able to predict before they occur thanks to the deep learning capability in the artificial intelligence technology algorithm. Before the 2008 crisis, a few financial geniuses noticed the crisis before came, by only examining the mortgage bond types as well as the payment terms of the mortgage debts, and they could open a short position accordingly. DeFi will support the system it will establish, thanks to artificial intelligence algorithms, and will be able to detect risks and crises beforehand and take positions. When these geniuses warned the system administrators in 2008, the doors were shut on their faces because these bonds had only earned since the first day, the administrators sacrificed the system to the rising, winning markets for emotions or whatever the reason. The same is happening today, the monetary expansion that took place after the Covid-19 crisis causes inflation in the world, but the central bank presidents of other countries, including Powell, the head of the United States central bank, sacrifice the system as usual in order not to disrupt the trend of the stock markets, which break records every day, and the debt bubble they created. They are dragging the whole world into an inflationary environment that will last for years. The algorithm will not manage the system with emotions as it is now, but with analysis and numbers as it should be in reality.

The Roles of Blockchain and Distributed Ledger Technologies in DeFi

If we explain the distributed ledger technology briefly and clearly, we can say that it is shared and synchronized decentralized databases. The thing that financial markets are most afraid of right now is the manipulation of data kept in central databases by the data controller itself, without being hacked or attacked. In 2008, Satoshi Nakamoto introduced blockchain technology in his Bitcoin white paper with the decentralization, inter-node synchronization, and consensus feature provided by distributed ledgers. Today, DeFi offers us the ability to manage the decentralized system with nodes, and the security of the consensus formed by the synchronization of these nodes. It is impossible to manipulate the system externally or internally because decentralization and synchronization prevent this.

The Role of Smart Contract Technology in DeFi

Smart contracts are a kind of algorithm that first emerged with Nick Szabo, then the security offered by the blockchain technology was understood and the value was reconstructed on the blockchain infrastructure. Smart contracts are a process in which the mutual demands of the parties to the contract are managed by an algorithm. Smart contracts in DeFi offer security and transparency to system users. Because smart contracts were built on blockchain infrastructure after Vitalik Buterin announced Ethereum. Buterin took the security of the blockchain system, the speed, and transparency of smart contracts and offered humanity a secure, decentralized, and transparent financial system and DeFi promises transparency, security, speed, and decentralization in a system where smart contracts manage.

Democratization of Finance

DeFi’s passion is for a decentralized and democratically governed system, its vision since DeFi’s first appeared. Thanks to the blockchain and distributed ledger technology, the users of the system will create nodes and these nodes will manage the system democratically thanks to the consensus opportunity. This democracy, which has made DeFi stands out from the very beginning, is because the users of the system, we humans, manipulate the process at every opportunity, steal from us due to their greed and take the system into crisis, and after all these events, the central banks remain silent and in a crisis that occurs later. We are so tired of helping only those who cause the crisis. A democratic system managed by software, in which they have the right to govern, gives hope to people. However, this democracy offered by decentralization has some negative aspects because the seizure of the majority by power or the inability to form a majority in times of crisis can drag the system into inextricable chaos.

Stable Coins

The emergence of stable coins was after the market volume of cryptocurrencies increased and turned into an investment market. As the demand and hope for cryptocurrencies increased, people's traditional investment ideas changed completely and they started to invest in cryptocurrencies. In this demand, he transformed the crypto market into a market with volumes of trillion dollars for a period. This volume caused volatility in the market because a market where an investment is made, especially a new market like cryptocurrencies, inevitably reacts to every news and volatility occurs. This situation disrupted the original purpose of these coins because no one wants to use money that changes by 50 percent in a month, except for trading, but some of these coins are used in smart contracts, some in the international money transfer network, some against inflation in current fiat currencies. out to maintain purchasing power. After these problems, stable coins were introduced. These coins, which are pegged to low volatility instruments or fiat currencies, have provided an opportunity to the user in the use of smart contracts or in other areas. Those who wish can quickly perform a smart contract transaction with a dollar-pegged cryptocurrency or protect their purchasing power against inflation with a coin pegged to gold. The place where stable coins really shine will be DeFi, which is the main topic of this article because DeFi promises to take over the world financial system and make it decentralized in the future, but this target does not have a reserve currency at the moment. Bitcoin or other cryptocurrencies are too volatile to be the reserve currency of this target, although most of the stable coins are currently pegged to the dollar, the main purpose of DeFi is to escape the hegemony of the dollar, leaving precious metals, but unless gold or silver is freed from the manipulation of centralized finance, they are against DeFi philosophy. For this reason, the DeFi stable coin idea should be used as soon as possible and volatility that can be used in this crypto money ecosystem should reveal a currency like current fiat coins.

Conclusion

Changes and improvements always occur when systems are clogged. The finance managed by the central system is now clogged, it can't progress any further and the problems have now gone beyond the holes and started to turn into big whirlpools and start to pull us in, however technology offers us new opportunities, with these opportunities, we have to solve these problems that the central systems have revealed and revise the system so that the system continues to function and move forward. . Although DeFi promises many innovations and developments, it cannot go beyond dreams that they can replace centralized finance, but ignoring these innovations that DeFis offer us will leave us alone with problems. so that we can solve our problems. In fact, world finance, which is managed with a common currency, where each of the world's states is a node, is not a bad idea at all...

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DeFi and Stable Coins

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Written by Şaban İbrahim GÖKSAL