DeFi – Decentralized Finance.

Let’s discuss one of the hottest topics in the Crypto space.

DeFi is a fast-growing industry in Decentralized Finance. It is one of the fastest-growing trends on the Blockchain.

Traditionally, finance, money markets, and the economy, in general, are centrally controlled by the power of central banks located in almost every country in the world. These central banks are responsible for issuing the currencies that drive economies.

The major problem here is that since these central banks control the creation and issuance of money when a problem arises, the risk is also pivotal, and that risk is fundamental.

What could go wrong, you ask? What if, during a time of financial crisis, these central banks decide to print lots more money (remember fiat does not have the backing of Gold, Silver, or any other precious metal) and this flood of currency backfires?

Recall if you will, Venezuela, and the massive inflation of 1,000,000% they recently experienced. In their efforts to try to deal with the oil price drop, and the effect it was having on the economy, a massive influx flood of currency was printed and issued by the central banks. This error in human judgment destroyed the economic balance.

Then there is the issue of depositing your hard-earned cash into savings programs with a bank, and they, in turn, from these funds issue high-interest loans. These loans generate a high return of profit for the bank, yet, you receive a minimal amount of this interest profit. Due to world-wide inflation hovering around 3.5% (about 2% in the USA), this profit returned to you becomes less valuable.

Some of us choose to invest. So we seek a broker or financial officer to advise us on investing our cash in mutual funds, share markets, and other schemes in return for a portion of our profit. If these ventures are successful, the return on investment is higher. However, these advisors, being human, oft times fail to see some market risks and make mistakes that result in loss of profit, which proves to be costly to us.

In comparison to the wealthy, the average middle-class person owns fewer shares in companies. Although that number has grown since 2017, it remains disparate. The fact is, there are people in some countries who never even have the opportunity to access the stock market.

We have very little control over investments of our money due to the lack of transparency in the global financial market. But aren’t cryptocurrencies supposed to change all that? Bitcoin and other early cryptocurrencies do offer a way to sell, buy, and trade without the need of intermediaries, therefore, eliminating banks and other financial institutions for settling transactions. However, they have not decentralized the financial system. They have just decentralized the issuing of money and its storage. A couple of issues remain to overcome, which prevents the blockchain from becoming completely decentralized.

  • Even though cryptocurrencies are decentralized, they remain accessible on centralized exchanges.
  • Most of these crypto projects use centralized companies that lack accountability or transparency to manage these projects.

It seems we are still trusting in banks and fintech firms to manage our funds. However, decentralization and transparency of the blockchain with the creation of DeFi (decentralized Finance) and it’s products, they have a goal to eliminate these issues.

What Makes DeFi Different?

DeFi can offer you control over what happens with your assets. You decide! It can do this because DeFi is decentralized, and through transparency and blockchain technology, you can know what is happening with your assets at any time. Additionally, many developers are adopting their apps on the “open source” protocol for use in trading on decentralized platforms. Open source protocol allows anyone to use and build new and better products utilizing this technology freely. Developers across the world can then collaborate to create more security and better innovation into their products.

Collectively the products of DeFi are known as “open finance.” DeFi includes such things as smart contracts, digital assets, protocols, and Dapps. Given the flexibility, and the amount of development, the Ethereum platform is the platform of choice for DeFi products; however, it is not the only choice.

Some of the products offered through DeFi’s Ecosystem include:

Open Lending Protocols

Read more about these here: https://blockgeeks.com/guides/demystifying-defi-ultimate-guide/

As the name suggests, this is a digital money lending platform built on a blockchain. Open Lending Protocols have probably become the most popular among other open finance sectors in recent years, thanks to the recent extensive use of Dai, other peer-to-peer protocols such as Dharma, and liquidity pool designs such as Compound Finance...”

Stablecoins

Unlike other crypto coins which have a volatile value, stablecoins are blockchain-issued tokens designed to hold on to a specific value. This is usually done by pegging it with fiat currencies like the US dollar, but oftentimes with other assets like gold. Stablecoin incorporates collateral to accommodate for the price variation...”

Stablecoins can be primarily categorized into 3 types:

  1. Fiat-Collateralized
  2. Crypto-collateralized
  3. Non-Collateralized

Exchanges and Open Marketplaces

Unlike centralized exchanges, such as Coinbase, decentralized exchanges have peer-to-peer transactions of digital assets between two parties on the blockchain with no third-parties involved. The advantage of this approach is that there are no sign-ups, no identity verification, or any withdrawal fees..”.

Issuance and Invest Management Platforms

This sector covers a broad range of platforms. A significant portion of issuance platforms is honing in on the security token market. This platform also includes exchanges like tZERO from Overstock, which also acts as issuance mediums...”

How Decentralized Is DeFi ?

This information is courtesy of https://blockgeeks.com/guides/demystifying-defi-ultimate-guide/ and is important facts to know so it is copied direct.

In crypto space, it is said –

“A system is decentralized only as its most central component.”

This is part truth since decentralization exists in sequence and on multiple levels. The degree of decentralization in DeFi services varies since neither every component can be decentralized nor it should be.

For example, let’s talk about categorizing decentralized Lending Protocols which can be done based on common components all DeFi lending protocols, such as custody, price feeds, provision of margin call liquidity, initiation of margin calls, protocol development, and interest rate determination. 

Degree 0 Defi aka CeFi: Centralized Finance (CeFi) products are custodial in nature, use centralized price feeds, and initiate margin calls, provide liquidity for their margin calls, and centrally determine interest rates all centrally. 

Examples – BlockFi, SALT, Celsius, Nexo.

Degree 1 DeFi: These categories of DeFi products are non-custodial but use centralized price feeds, initiate margin calls centrally, provide liquidity centrally, centrally determine interest rates, as well as centrally administer updates and platform developments. 

Examples – Dharma.

Degree 2 DeFi: These level 2 DeFi products are non-custodial but have one additional decentralized component from the list while rest are centrally operated. 

Examples – Expo, Nuo, ETHLend.

Degree 3 DeFi: Degree 3 DeFi products are also non-custodial and have permissionless initiation of margin calls and provision of margin call liquidity, while the rest are centrally administered.

Examples – MakerDAO, Compound.

Degree 4 DeFi: What’s different in these types of DeFi products are in addition to being non-custodial, having permissionless margin calls and provision of margin call liquidity, its price feeds are decentralized, while the rest two are centralized.

Examples – dYdX,  Fulcrum.

Degree 5 DeFi: Here, the interest rate determination is decentralized along with the first three components in Degree 4 DeFi, but the control for the platform developments and updates is centralized. 

Examples – bZx.

Degree 6 DeFi: In the last category every component of DeFi should be decentralized. But as of now no DeFi protocol is completely decentralized.

Similarly, for Stablecoins also, except for a few like DAI, not all stablecoins are decentralized. They are simply tokens that represent fiat currency deposits held in a bank somewhere. That’s why you can tokenize your asset and move around the blockchain, but the need to redeem and manage the money physically exists. 

Until the law completely adapts to DeFi services, there will always be some form of centralization. For example, take the case of buying a property on the blockchain. Though you can tokenize the deed, the law and the court of that country should recognize that. 

Do DeFi’s carry risk?

With any high return product, there are always risks. DeFi’s are no exception.

We must all treat Cryptocurrency Assets as valuable because they are! We would not leave gold, diamonds, or even cash lying around, so why would we not secure our Crypto Assets as well? Always, always keep your private keys and passwords stored in a safe place! Perhaps an asset storage hardware device and two-factor authorization?

Anyone or group that deals who deal with financial products and keeps records thereof require specialized knowledge. With this in mind, we must realize that there are definitely risks involved.

With the stakes high naturally, hackers are always on the prowl to try to get into and steal from any cryptocurrency wallet or financial product. Remember the hack of the DAO in 2016? The hacker managed to crack some coding vulnerability and transfer 1/3rd of the DAO funds to another account. This hack forced the Ethereum Blockchain to hard-fork to be able to restore those funds. The Dapp and Smart Contract security have since become much more secure. But to take for granted, this will stop hackers ultimately would be a mistake, as they will always continue to try.

Hopefully, soon, we will see DeFi become the “New Norm” in finance with a wider scope of users than the traditional finance enjoys. Would that be a bad thing?

Should you want to read more about this technology and delve deeper into it, please go to https://blockgeeks.com/guides/demystifying-defi-ultimate-guide. – credit to the same

About the author

Gail holds one of the most challenging role in the Compumatrix Leadership: Membership. She ensures that that members and potential members enjoy the benefits of being part of the Compumatrix community.

Comments

  1. What an excellent read and so much significant info here. — this is a 5-6 time reader before I can grasp most of the info in this posting — I keep reading the posts here by some very talented people and I can only say Thank You for your effort in helping all of us here — but dadgum this is impressive Gail — sincerely thank you — RJ.

    1. Thank you, RJ, yes that topic is extensive and a bit deep, but once you grasp it, then it makes tons of sense. The world of Crypto is moving us to an alternative way of doing business. Decentralized, to me, is much better, safer, more secure, and transparent! Bring on the change!! The time is NOW, and people are ready. This is a shift in perspective and moving us to a society where we all have a right to be!!

    2. Regarding the topic of discussion about Decentralized Finance by Gail: I agree and agree with the new financial system that will be easy for us to control finances. And we understand that many people do not know about Decentralized Finance. So if we read a lot about this article, it will undoubtedly add to the insights and knowledge about Decentralized Finance. And along with economic progress, I’m sure that this decentralization of finance will benefit everyone.

  2. i believe you are so correct in your observations and your perspectives towards keeping as much as we can — Free of the old way of central banks and fiat currency and I truly do believe that here in America the less govt. regulation involved in our daily business life and our Life actually — the better imho it will be — and yes I do live in Middle America and I will always Love my Freedom !! fact — and thanks again Gail great stuff —

    Please download the free version of Grammarly at grammarly.com and use it to edit comments. This comment has 13 items that need correcting.

    1. I couldn’t agree more, RJ. There is room for everyone to make good money honestly if they choose to! All this hacking and control grabbing is just silly as far as I’m concerned. All people want to do is live their best lives, worship in their way, enjoy family, friends, live in peace, and help others when and where they can and to be left alone to do so.

  3. Thanks, Gail, for the great information. One thing I keep referring back to is holding my keys. I control my assets to do as I please. If someone else holds my keys like an ex-changer, they control my assets.
    When you take money to a bank and deposit into your account, it is their money. You have no control over what they do with it.
    Since we are using the Bitshares Dex trading site and our Compumatrix platform, we are in control of our assets. That is the beauty of the decentralized system.

  4. Thank you for your in-depth knowledge of Decentralized Finance! From my understanding, I think Decentralized Finance will become a more understood topic in the future, which will make it more popular! Hopefully, moving our economy to a more decentralized economy instead of a more centralized economy. A decentralized marketplace will be more controlled by the people who put their money into the economy rather than by one central group of people.

  5. I agree with all the comments – when our money is decentralized and not taken over by the banks, then we are responsible for the care. We can no longer blame or criticize the banking system. so then we need to learn all we can as we work through these
    new ways. Thank goodness for all the helpful articles, and as a note to self, it will be more understandable as we work through the process.

  6. What an insight into this new world of DECENTRALISED FINANCE.
    As Gail rightly says, it takes a lot of re-reading. Shall check out blockgeeks.com and get a more in-depth insight to know more about this useful and practical technology.
    More articles will surely be coming up, and we are indeed fortunate to keep learning something new and more, each day that goes by. It will be very helpful when the time comes to use this new system.

    1. Thanks so much for this blog. Every time I read about DeFi, I learned something new. The more and more I read about stablecoins makes me feel that we’re that much closer in gaining a higher percentage of the market share in the financial sector. In my personal opinion, I do not wish fiat or big banks to fail. I do agree that it will cater to inflation with the amount of quantitative easing we have seen this year and over the years. But if we start seeing failures in the mass of fiat’s, then we run the risk of more government opposition.

  7. The purpose of Bitcoin Blockchain was not to be a digital coin or a way of payment, not even a ledger keeping. But to be a decentralized system. When you take that decentralization to the next step to financial smart contracts and decentralized applications (DApps) and bring it to use cases like trading, lending, investment, wealth management, payment, and insurance on the blockchain. You just created a better-decentralized peer to peer finance network.

    please reword this comment. this is a run on wordy sentence – “When you take that decentralization to the next step to financial smart contracts and decentralized applications (DApps) and bring it to use cases like trading, lending, investment, wealth management, payment, and insurance on the blockchain.”

    1. Jorge, I believe that you are correct about the bigger picture purpose of the Bitcoin Blockchain was for it to be decentralized and a system. The potential of that decentralized system is nothing short of staggering and seemingly mind-blowing to many. I say that because typically when I attempt to explain the blockchain and decentralization, most people get that “far away mind-blown look” in their eyes. At the same time, they try to be polite and squirm for an easy exit from the conversation. lol

  8. Gail, you have outdone yourself with this article! I learned quite a bit by skimming through it tonight but I will return to read it and absorb it properly when I’m not so sleepy… LOL But it really opened my eyes to a few things and I’m eager to return and read more. I really like the fact that DeFi is coming into its own because it is really needed by many people globally.

    This provides a way for people without access to traditional investment vehicles to be able to still invest and that is a very good thing! The new BitSharesLabs BLINC program, called “CryptoSaversClub” comes to mind, as another way for Compumatrix members to participate in DeFi.

    1. Thank you, Kevin. I agree this is not one of the quick reads and does take returning to, for understanding some of the technical aspects. But, it is well worth knowing as it very well could be an avenue a lot of us want to pursue someday. And to have previous knowledge is undoubtedly going to be a plus. It never hurts to broaden our horizons!

  9. Kevin so right on this Posting by Gail — I have read this three times and going to be reading it more over the weekend — there is just so much here, and it starts to make things more transparent for me anyway, and that is a good thing — lol but wow reading the replies is a big help also and doing Global DeFi I think also is definite Plus for us here as being able to keep politics out of our wallets is a good thing, IMHO — coming from almost 50 years of being in some kind of workforce or land business —

  10. Thank you so much for taking the time to share this learning material with us. I know I’m not alone in my interest in this technology as someday I perhaps will take advantage of one of these products. It is excellent knowing and learning ahead of time what each product has to offer as it makes my decision on which avenue to pursue, an educated one!

  11. The purpose of Bitcoin Blockchain was not to be a digital coin or a way of payment, not even bookkeeping. Its main purpose is to be a decentralized system. When you bring to the blockchain this decentralized system for use cases like trading, investment, payment, smart contract, and Dapps; you just created a better peer to peer decentralized finance network.

  12. Wow, what a ton of information this blog has, I have never heard of this before so I have learned a lot tonight, it seems like there are so many programs now coming out. It is a good thing, though. I just wish the centralized would be left entirely out of the picture.

  13. Thank you for this very interesting blog Gail. It is very informative and talks about some aspects of Decentralized Finance that I didn’t know yet. I really need to read this one several times before I can fully understand it. The link you mentioned in your blog is also worthwhile reading.

  14. I am very impressed with this blog of information. I love the innovations that the Crypto space is creating and bringing forth for all to take part. We are very fortunate to be living in this age of enlightenment and technology! I saved this blog and intend to read it over many times, and once Compumatrix releases its DeFi program, you can bet I will be first in line to take advantage!!

  15. I have read this again and took more from it — just great stuff — agree so much in the decentralize parts of any financial system or business for that matter — this possible new way of finances maybe not new but different at least — really I would hope helps put more security for everyday people and their ifes’ savings and who work hard and now smarter I believe —

  16. Decentralized finance offers me the opportunity to hold a visual image of a different world. The biggest buildings in any city are normally the banks. Imagine with me if you will, you walk up to your favorite big bank and instead you see a row of shops including outdoor cafes. You sit down and have a quick lunch paying for it on your phone. Banks have now gotten into decentralized financial solutions and don’t need behemoth downtown locations. In an unpublished blog, I talk about banks vs bitcoin and I think we have some real-life solutions but decentralization is the big picture.

  17. More and more each day, I see “DeFi” in the headlines of crypto articles and leaders speaking of it. I appreciate the breakdown of “phases” to true decentralization, Gail. We’ll be building that bridge for awhile as people get used to the new way of doing financial exchanges. As long as we don’t forget where we’re headed, and why, we’ll do GREAT ♥

  18. This article is full of innovative and forward-looking technology. I did not have my technology hat on when I read it. The gist of what I read is there are more secure and quicker methods of moving our digital currencies. I appreciate the gift of such technology and Gail for sharing it.
    I will go back and read again and research, Iwant to be in the know.

  19. My hope is that the world moves more toward decentralized finance, but decentralized finance is still very new to the “average joe who walks down the street”. Once the “average joes” start understanding decentralized finance and the benefits of it, I think decentralized finance will have a very good chance of being the future for all transactions.

  20. just had to read this again and try to comprehend more of this Defi and decentralized business models — there is literally so much info to glean and try to understand it is a massive undertaking — I have not put all in all yet but with each blog here and other articles around decentralizing as best you can is smart thing and you also have to have like stablecoin index to literally turn online crypto into offline spendable ??? this is very intriguing at the very least –thank you —

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