What is DeFi?
DeFi is defined as "an ecosystem composed of applications built on a distributed ledger to facilitate financial services without permission." It generally refers to encrypted assets, financial smart contracts and agreements built on smart contract platforms. For this smart contract platform, in fact, almost all DeFi applications are built on Ethereum.
Ethereum is a blockchain platform that provides various templates for users to build applications. If building an application is compared to building a house, then Ethereum provides modules such as walls, roofs, and floors. Users only need to build a house like building blocks. Therefore, the cost and speed of building applications on Ethereum are greatly improved.
There are many functions in centralized finance. such as:
(1) Legal affairs, compliance, KYC, AML, accountants, law firms;
(2) The exchange, the China Securities Regulatory Commission, and the China Banking Regulatory Commission go to supervise the exchange. What the exchange and the China Securities Regulatory Commission do is to match transactions, review transactions, settle and supervise;
(3) Banks and brokerages. Do custody, payment, and lending.
(4) Central Bank. Provide currency.
These functions are implemented in centralized finance. Although it works well, it has many disadvantages. These shortcomings can be supplemented by Defi.
For example, there is no need for a central bank in Defi because it has its own digital currency. Bitcoin, Ethereum, EOS, USDT, USDC can all be used as the underlying payment method; Defi has smart contracts, and in Ethereum, the code is the law. So we don’t need legal affairs and judges, as long as there are smart contracts, we can judge which contract can be executed;
At the same time, you only need to write the smart contract and it will be automatically executed when it expires. There is no contract dispute; because it is built on the blockchain, the contract will not be tampered with, and the contract does not need to be kept in a notary or safe; all transactions are Can be traced, transparent and fair; Defi is born without borders and disintermediation.
These features of Defi can make up for the shortcomings of centralized finance. For example, centralized finance is difficult to universally benefit. Its transaction costs are very high, the transactions are complex, and the speed is slow, and there are intermediaries such as banks, exchanges, brokerage firms, accountants, and lawyers, all of which charge service fees.
Defi is a supplement to the future of centralized finance. We cannot say that Defi can subvert centralized finance. This is unlikely, just as it is impossible for ants to shake elephants. But it is very good compensation and try. Centralized finance can make up for it in Defi if it does not do well.