How Blockchain Enables DeFi and DAOs

Millions of people are harnessing the power and transparency of blockchain technology to build new economic systems powered and governed by code. Blockchain aims to democratize finance by replacing legacy, centralized organizations with peer-to-peer relationships. Blockchain isn’t just about Bitcoin and cryptocurrency. It has the potential to revolutionize a range of applications.

What is blockchain?

By its nature, a blockchain is a distributed digital ledger that stores all participant data. It records information for cryptocurrency transactions, NFT ownership, DeFi smart contracts, and more.

On the one hand, any traditional database can keep track of all transactions and changes. Still, blockchain is unique as it’s decentralized and holds information on multiple computers within the network. Such computers are called nodes.

A blockchain collects information in groups known as blocks. Blocks can hold a set volume of data and are then closed and linked to previously filled blocks. Such linked blocks form a chain of data known as a blockchain. So the name blockchain isn’t random.

The legitimacy of the new data must be verified and confirmed by most nodes. Otherwise, new blocks cannot be added to the blockchain. Decentralized blocks are immutable, meaning that the data entered and stored cannot be changed. If somebody tries to alter a block at one node, the other nodes won’t be altered and won’t confirm the block. Thus, fraudsters have no chance to tamper with the blockchain records.

The distributed ledger technology of blockchain will likely replace notary publics, manual vote recounts, and how the overall conventional banking system works. As a result, new technologies and organizations like DeFi and DAOs are entering the world’s business arena.

What is DeFi?

Decentralized finance, or DeFi, represents the shift from a centralized financial system to peer-to-peer finance powered by decentralized technologies and built on a blockchain. With DeFi, users can perform most of the services banks provide — borrow, lend, earn interest, trade, and more. Only it’s much faster and doesn’t require any middleman or tons of paperwork. Thus, the transaction fees are significantly lower.

Instead of going through financial institutions, DeFi participants can enter into a smart contract, borrow or lend assets, and smart contracts will ensure everyone fulfills their obligations.

“DeFi takes the key elements of the work done by banks, exchanges, and insurers today — like lending, borrowing, and trading — and puts it in the hands of regular people,” says Rafael Cosma, CEO, and co-founder of TrustToken.

The key breakthrough of DeFi is that it allows crypto assets to be used like traditional assets and fiat money. DeFi is making its way into a wide range of financial transactions and protocols like e-wallets, traditional financial transactions, decentralized exchanges, and others.

For example, The Standard is one of the DeFi protocols with yield farming at its core. Ecosystem participants can generate the sEURO, a stable virtual currency. Users can collateralize both cryptocurrencies and precious metals. This means that users can use tangible and intangible assets to lock up as collateral.

Benefits of DeFi

• Transparency. Everyone involved has access to the complete history of transactions.
• Full automation. DeFi transactions don’t require human input. They are automatically executed via smart contracts.
• Immutability. Blockchain blocks ensure tamper-proof data coordination, increasing the security and auditability of transactions.
• Trust. Unlike banks, DeFi allows anyone with a crypto wallet and internet connection to access the provided services.

What is a DAO?

A decentralized autonomous organization, or DAO, is like a limited liability company. “A DAO is an internet community with a shared bank account,” says Cooper Turley, an investor, and developer of several popular DAOs.

A DAO is fully autonomous and transparent, thanks to blockchain and smart contracts. It’s governed entirely by its members, who make decisions about the project’s future together. DAOs have no familiar hierarchical structures.

All the rules are written and fixed by smart contracts. No one can change and edit rules without being noticed. Like any LLC, DAOs also need funding. Any funding collected is mainly based on token issuance and crowdfunding.

Nowadays, DAOs are actively used across a spectrum of use cases such as fundraising, charity, investing, buying NFTs, and more. Many analysts believe that DAOs will soon replace many traditional finance organizations.

What’s the role of blockchain for DeFi and DAO?

From DeFi protocols to DAOs, blockchain technology is powering them all. It is the backbone that maintains the structure, roles, and rules of each on-chain.

Most existing DAOs and DeFi protocols run on the second-largest blockchain, the Ethereum network. But this doesn’t mean that only Ethereum can be used for developing DeFi apps and DAOs.

Blockchain has a great potential to change traditional businesses and organizations. Taking into account the latest spike of investment into blockchain-based projects, the greatest changes are yet to come.

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