Blockchain has been around for more than ten years since the birth of Bitcoin, and its real turning point is the birth of smart contract platforms. Smart contract platforms have brought new species. At present, the most important are financial and gaming aspects. In terms of finance, it is mainly DeFi.
From the beginning of 2019, DeFi has become a long-term hot topic in the blockchain field. Platforms and products that provide DeFi services have also sprung up. Among them, decentralized lending projects have caused a lot of waves in the market, and DeFi is considered to be a "new financial revolutionary movement." So what is the essence of DeFi?
What is DeFi?
Don't feel strange, like the Lightning Network, decentralized exchanges, online lending platforms, insurance platforms, decentralized wallets, etc. that we often say are all in the DeFi category.
DeFi is an abbreviation for Decentralized Finance and is also known as Open Finance. It actually refers to the decentralized protocol used to build an open financial system, designed to allow anyone in the world to carry out financial activities anytime, anywhere.
In the existing financial system, financial services are mainly controlled and regulated by the central system, whether it is the most basic access to transfers, loans or derivatives transactions.
DeFi hopes to establish a transparent, accessible and inclusive peer-to-peer financial system through a distributed open source protocol, which will minimize the risk of trust and allow participants to obtain financing more easily and conveniently.
Why is DeFi the second breakthrough in crypto history?
The first breakthrough in crypto history is Bitcoin, and DeFi can be regarded as the second breakthrough. Although it has not reached the height of Bitcoin, it has already begun to take shape and has potential for growth.
Why is DeFi the second breakthrough in crypto history? Because its existence can meet the financial needs of some people, and these financial needs cannot be met by traditional finance: opaque financial and economic crisis
The core object of finance is currency. In the history of mankind, there have been shells, precious metals, gold and silver and other currencies. To this day, they are fiat currencies.
Through the integration and operation of intermediary institutions, traditional finance has improved market efficiency and achieved better resource allocation. At the same time, due to the existence of intermediary institutions, many problems have arisen in the traditional financial system, such as opacity and spam.
This leads to excessive debt and excessive inflation. Once the economic development stagnates or there is excessive unevenness in economic distribution, and the debt structure is not digested in time, it is easy to erupt an economic crisis.
In the current intermediary-dominated financial structure, the economic crisis seems to be difficult to avoid. The core of the blockchain is transparency and distribution, which leads to the opportunity to change the current status of the current financial structure. That's why DeFi works in the future.
In general, compared to traditional centralized financial systems, the DeFi platform has three major advantages:
a. Individuals with asset management needs do not need to trust any intermediary. The new trust is rebuilt on the machine and code;
b. Everyone has access, and no one has central control;
c. All protocols are open source, so anyone can cooperate on the agreement to build new financial products and accelerate financial innovation under the network effect.
DeFi current issues and bottlenecks
Many insiders are excited about the future of DeFi. But at the same time, the status quo in the early stages of development is that most users have low awareness of it and the number of users is still very small.
On the one hand, the development of DeFi is subject to the performance of the underlying public chain. The current DeFi project is mainly built on the Ethereum network. At present, the performance bottlenecks of Ethereum are relatively prominent. There is still a long way to go before breaking through the performance bottlenecks. In this situation, those DeFi projects that have higher performance requirements will be in an awkward position.
On the other hand, compared with traditional financial products, decentralized financial projects are much more difficult to use and require higher user awareness, which will also greatly affect the development speed of DeFi. In addition, the security of decentralized financial projects also needs to be proven in practice.
Can DeFi distributed finance really be realized?
In the development of blockchain technology, there have been ups and downs, and many new concepts have appeared on the basis of this. However, these concepts, which have been guided by theory, have not been recognized by the public in real life and have not been corresponding. Product application landing.
On the one hand, starting with Bitcoin's peer-to-peer payment, there are actually many DeFi distributed financial products. At the application stage of Ethereum smart contracts, DeFi distributed financial products are more commonly used in dapps, including financial derivatives and Centralized loans, etc. However, these applications do not highlight their advantages.
On the other hand, there must be regulatory risks in the financial industry. However, technology is the key factor, unless the technology itself can support the entire financial activity, in order to remove the burden of supervision.
However, the technology development at this stage is immature. Although many investors in the market recognize this concept and think that this is the trend of future financial development, the current market is not stable and the technology is not mature. Even a high evaluation is not practical. effect. However, maybe DeFi distributed finance can provide an exploreable direction for future financial services.