DeFi — A Buzzword Or A Working Technology
By Polina Keremidchieva on ALTCOIN MAGAZINE
I am pretty sure you can name at least 10 keywords connected to crypto which have stuck in your mind like a catchy tune you are not able to get rid of. Let’s start with “crypto” itself, “bitcoin” of course… and “blockchain”. Now go through “ICO”, which can evoke some painful memories, and then IEO. We then say “DAO” and things become a bit brighter up until we reach the top of the hill of hope where “DeFi” shines. And DeFi really arouses positive feelings about better financial opportunities. But we are yet to see if DeFi will be a truly working technology or just a buzzword.
DeFi is now all around us and, for instance, my timeline got flooded last week with tweets about Coinbase investing 1 million USDC each in two lending protocols — Compound and dYdX, which alone speaks for the fast adoption of DeFi concept and technology.
But What DeFi Is Really About?
When looking from the tech perspective, DeFi stands for “Decentralized Finance” and represents a technology to build the well-known financial tools on top of Satoshi’s blockchain (and all the derived networks) in order to improve them. In other words, it leverages decentralized networks to transform traditional financial products into trustless and transparent protocols that run without intermediaries. The aim is to achieve a decentralized manner of trading, borrowing, lending, and managing assets.
Looked from a more philosophical perspective, DeFi is a whole new movement with the main goal to revolutionize the traditional financial system. DeFi aggregated a vast and open community which shouts out loud for removal of all third-party services; for accusing the banks of being corrupt and useless middlemen, and for the establishment of the new open and transparent financial system.
As Corbin Page (Product Lead of ConsenSys) says:
DeFi has also gained a momentum thanks to the rapid increase in the development of such products. We are now witnessing many good projects which try to follow the DeFi concept. Since Ethereum provides the ability to build advanced smart contracts, the creation of complex financial products on top of blockchain is now a fact. Lending and borrowing, stable coins, decentralized exchanges, and atomic swaps are just the beginning of this fruitful brand new financial ecosystem.
Features
As I used the phrase “..projects which try to follow the DeFi concept..” I meant a few key features which should be fulfilled for a product to be considered as a DeFi.
Here they are:
- Trustless — we don’t need to trust a bank or a government of any country anymore to take care of our assets or to control the value of the currency. In a DeFi dApp, the financial value is either stored securely or transferred peer-to-peer using smart contracts, which cannot be changed once created on the blockchain.
- Permissionless — no registration or personal data is required to access the service (e.g. DEXs) and the access cannot be banned.
- Non-custodial — the owner is in full control of his/her own assets and no third party has the custody of them. The owner is the only one who can store or transfer his assets by using his private key.
- Open and Transparent — as we already said, DeFi products are built on blockchain which means that all the asset movements, transactions, and data are recorded there allowing anyone to view and trace them. Moreover, DeFi projects are open-source and you can usually see and check the functionalities of the source code in GitHub.
- Secure — DeFi cherishes user’s privacy and allows you to keep your identity unrevealed. Also, since the service is absolutely decentralized, there is no single point of failure and no central entity to be hacked.
- Financial — all of the above features are required for any successful dApp built on the blockchain but in order to be considered as DeFi, the dApp has to offer financial tools such as trading, borrowing, lending, and managing assets.
Conclusion
The development of DeFi is interesting and will most probably be the main topic in crypto in the foreseeable future. It is hard to make any predictions but first, the DeFi projects should strive to achieve wholly all of the features listed above, and second,… well, let’s see together.
As DeFi is rapidly evolving at the moment, I will not make a conclusion whether DeFi is a buzzword or a successful technology, because we are not stopping here. There will be other articles coming soon to follow DeFi’s evolution. We will observe and comment together everything that starts with De and ends in Fi. See you soon!
