Decentralized finance: financial markets based on blockchain and smart contracts

Decentralized finance (DeFi) refers to another financial method developed by the Ethereum blockchain. DeFi uses smart contracts to create contracts that replicate existing financial services in an open, interactive and transparent way. This article focuses on the technical and potential risks of the DeFi ecosystem and examines several layers of various DeFi building modules and implicit architectures, including token models, decentralized exchanges, decentralized debt trading, regional derivatives. blockchain and activations. prepare a frame. Chain asset management contract.The conclusion of this article is that DeFi is still a risky niche, but it also has a lot of performance, transparency, easy access, and integration features. Thus, DeFi can help build a solid and transparent financial infrastructure.

introduction

Decentralized Finance (DeFi) is a blockchain-based financial infrastructure, often defined as an open, unauthorized, and interconnected contract created by a group of public smart contract platforms (like the Ethereum blockchain).Specifically, it redesigns existing financial services in an open and transparent way based on open source process and application integrity (DApps) without the need for middle and middle class organizations. Contracts are rule-governed, changes are made in a secure and verifiable manner, and legal changes remain on the public blockchain. Thus, this housing project can create an irreplaceable and significant financial impact with visibility, unprecedented equity, and low demand for infrastructure of caregivers, intermediaries or supervisors.

DeFi already has many uses.For example, you can buy assets linked to the US dollar (called Stabilitycoins) on an exchange and convert those assets into a single investment wallet to make a profit, then add tools that benefit your distribution. at the pool or at the chain.

Smart contracts are the backbone of every DeFi protocol and application. awarenessElectronic contracts are typically sent to small applications stored on the blockchain and executed together by multiple users. As part of the public blockchain, the network was created to allow all participants to participate and verify the effective completion of each project. Therefore, the efficiency of smart contracts is lower compared to the average calculation. However, their advantage lies in their level of security. Smart contracts are always executed by the rules, and everyone can see for themselves the results of state changes. When used securely, smart contracts are transparent and reduce the risk of interference and unmanageable interference.

To understand the new version of smart contracts, we first need to look at the web server based query.When users interact with these applications, they cannot monitor the internal logic of the application and do not control the workspace that both can run. Therefore, users must trust the application. Smart contracts can solve both of these problems and ensure that apps run as needed. The contract code is stored in the base blockchain, so it can be verified publicly. The nature of the contract is decisive, and thousands of participants engage in parallel telephone operations (in commercial form) to ensure the accuracy of their implementation. When a transaction causes a change of state, such as a change in balance, those changes comply with the terms of the blockchain network, and are interrupted and protected in the blockchain state tree.

Smart contracts are flexible because they have access to rich information.It also allows you to store crypto assets, allowing you to play the role of administrator in deciding how, when and by whom this property is acquired publicly, using proper design principles. It can create many new applications and a thriving ecosystem.

DeFi is still a small niche, but those numbers are growing rapidly. The value of DeFi-related smart contracts recently exceeded $ 10 billion. It should be understood that this is not about packaging or marketing value, but about retention in smart contracts for many purposes. Figure 1 shows the cost of ETHer (ETH, Ethereum crypto assets) and the USD value of the assets registered in the DeFi app.

The incredible development of this tool and some of the new deals really shows that DeFi can fit into a larger context and win the satisfaction of developers, researchers, research and finance companies. This section serves as a research and presentation on the concepts of risk assessment and risk assessment and should be considered as a basis for further research.

DeFi Building Blocks

DeFi uses a multi-layered process and each level has a different purpose. These layers overlap and create an open set of procedures that allow anyone to create, damage, or use other parts of the group. These levels are hierarchical and are only as secure as the levels below themselves. For example, if the payment layer blockchain is affected, the next layer will be insecure. Likewise, any decision taken at the higher level will be void if used as the basis for the permit.

This chapter explores this process and provides an overview of the learning tokens and process details in more detail. The framework is divided into five layers: the payment layer, the hardware layer, the layer layer, the application layer and the aggregation layer, as shown in Figure 2.

1. The payment process (layer 1) includes the blockchain and manufacturing process, such as Bitcoin [BTC] from the Bitcoin blockchain and ETH from the Ethereum blockchain. This allows the network to securely store member information and ensure that each state changes according to its policies. Blockchain can be seen as the basis of skepticism and lead to troubleshooting and problem solving processes.

2. The property (level 2) contains all of the assets listed above. This includes the following assets and other assets outside of this blockchain (sometimes called tokens).

3. The Supply Chain Model (Phase 3) provides models for specific applications such as stock exchanges, debt consolidation, commodities and legacy supply chains. These templates are typically used in the form of smart contracts that can be accessed by any user (or DeFi app). Therefore, these processes are very interdependent.

4. The application layer (layer 4) creates user-oriented applications that connect to a variety of policies. Smart contracts are typically pulled from a web browser-based interface, making them easier to use.

5. The assembly process (layer 5) is a continuation of the application process. Aggregators create user-centric platforms that connect to multiple applications and processes. Typically, it provides tools to compare and measure services, allows users to simultaneously connect multiple processes to perform other complex tasks, and integrate critical data in a clear and concise manner.

Knowing the conceptual model, let's take a closer look at tokenization and the process. After a brief introduction to wealth tokenization, we'll learn more about decentralized commerce, decentralized lending platforms, decentralized derivatives, and on-chain asset management. This gives you the foundation you need to identify the potential and risks of DeFi.

Tokenization of assets

A public blockchain is a database that allows participants to create shared and unchanged personal information (ledgers). Typically, a list is used to track the lower processes of this blockchain. However, as public blockchain technology has become more popular, the idea of ​​adding value to this information has also become popular. The process of adding a new asset to the blockchain is called tokenization, and introducing a blockchain asset is called a token.

The general idea of ​​tokenization is to make assets easier to access and more efficient to trade. Specifically, tokenized assets can be easily traded by anyone in the world within seconds. They can be used in many classification applications and stored in smart contracts. Therefore, these tokens are an integral part of the DeFi ecosystem.

Through consensus, public blockchain tokens can be created in a number of ways. However, since most tokens are placed on the Ethereum blockchain by a smart card called the ERC-20 token model, most of these options are not valid. These tokens are interactive and can be used in any DeFi application. As of January 2021, more than 350,000 ERC-20 contracts had been shipped to Ethereum. Almost 90% of token lists are placed on the Ethereum blockchain.

From an industry perspective, we are more concerned with inventory than the underlying models used to work with digital representations of assets. The main motivation for adding value to the chain is to add stable funds. Although you can use the assets mentioned above (BTC or ETH), many financial contracts require fewer assets. Tokenization can create these tools.

However, one of the main issues with tokenized assets is manufacturer risk. Local tokens like BTC and ETH have no problem with this. On the other hand, if a person identifies a token with a promise, such as paying interest, paying a dividend, or offering a good or service, the value of the token will depend on the confidence of the statements. If the sender is dissatisfied or unable to deliver, the tokens may lose their value or be exchanged at a greatly reduced price. This assumption also applies to fixed parts.

In general, contract-based tokens have three supporting models: off-chain mortgages, on-chain mortgages, and unsecured mortgages. Off-chain collateral refers to the management of assets through supervision such as commercial banks. Chain mortgages typically mean a closed blockchain asset in a smart contract. In the absence of liability, the parties to the transaction have the highest risk. In this case, the promise is based on trust.

The chain guarantee has many advantages. It is very transparent and can block smart contract requests, allowing the process to run semi-automatically. A disadvantage of chain collateral is that this collateral is usually contained in local bond assets (or derivatives), resulting in exchange rates. Taking Dai Dai stable as an example, he creates a fair and reliable Dai token pegged at $ 1, often using ETH as a trading product on the chains. Since Ethereum does not always have a token pegged to the US dollar, the token must be backed by other assets. Whenever a person wants to issue a new Daiken token, they must first close enough in ETH according to the responsibility of the smart contract issued by the contract maker. Since the exchange rate between USD and ETH is not fixed, too many transactions are required. When the price of the basic ETH collateral falls below the minimum starting value of 150% of the value of the unpaid Dai, the smart contract will auction the collateral to offset the Dai debt.

There are also a few examples of off-chain mortgage stability coins. The most popular are USDT and USDC, both of which are stablecoins based on the US dollar. They can all be used as ERC-20 tokens on the Ethereum blockchain. DGX is an ERC-20 based gold backed security and WBTC is a tokenized version of Bitcoin which allows Bitcoin to be used on the Ethereum blockchain. Off-chain guaranteed tokens can reduce the risk of exchange as the product can be likened to tokenized applications (i.e. the return in US dollars of real US money). However, off-chain mortgage tokens can indicate risks and risks to the outside world. Tokens used in the market should be regularly checked and cautious to ensure that the underlying products are still available. This process is expensive and in many cases not completely transparent for token holding.

Many organizations are working on unpinned securities, for example securities that do not use a certificate to hold a pegged Stabilitycoin. Rebase tokens like Ampleforth or YAM are not suitable for stable coins. They not only provide stable units to the account, but also expand the holders to be weak in the form of dynamic numbers of tokens.

Stablecoins play an important role in the DeFi ecosystem, but it would be unfair to restrict tokenization to these assets. There are tokens for a variety of purposes, including management tokens for Decentralized Autonomous Organizations (DAO), tokens that allow staff to perform specialized tasks in smart contracts, and tokens are similar to commercial products or contracts, and even the traceable synthetic tokens are not visible. The value of real assets.

The other category is called a non-fungible token (NFT). NFTs are tokens that represent a special asset, such as a collector's item. It can be a digital representation of a physical device (such as a work of art) exposed to the risk of a third party, or it can be a digital unit of intrinsic value with some special characteristics. In any case, the non-fungible nature of tokens makes it possible to personally follow the owners of each asset and to verify the asset. NFTs are generally based on the ERC-721 token standard.

Decentralized transaction protocol

As of September 2020, there were over 7,092 crypto assets listed on the stock exchange. They don't usually affect the market and their market value and volume is amazing, but there should always be a market that allows people to trade some popular crypto assets. This allows asset owners to rebalance their risk exposure and adjust distribution data based on their preferences and risk profiles.

Usually, cryptocurrency trading is done by exchanging media. Intermediate exchanges are successful, but they have big problems. In order to trade on the exchange medium, traders must first place their assets on the exchange. As a result, they have directly lost their assets and have to rely on the forex traders. Unscrupulous or ineligible traders can seize or lose capital. In addition, the exchange has become a constant source of resistance and constant threats from third parties. The lack of control over control has exacerbated both of these problems and forced many exchanges to make short-term, large-scale efforts. Therefore, it is not surprising that some cryptocurrency currency exchanges have lost consumers.

Exchange procedures have attempted to solve this problem by eliminating the need for trust. Users do not have to invest in an intermediary exchange and still have control over their assets before a trade is executed. Complete marketing happens atomically through smart contracts. In other words, both parties to the exchange were successful because the exchange was not visible, which reduced third party credit risk. Depending on the specific application, smart contracts can play an additional role, eliminating many intermediaries such as the supervisory department and the central counterparty clearing house (CCP).

Early exchanges like EtherDelta were set up like garden walls and did not interfere with many operations. The exchanges do not share a market share, so the market volume is relatively small and the competition is high. The high cost of competition and the tedious and slow process of exchanging funds on these exchanges have led to periods of arbitrage in the past.

Recently, there has been a variation in the openness of exchange rates. These programs attempt to simplify real estate development trade by providing a model of how the real estate market works and allowing each exchange to be a leader in the process of using shared water and other rules. But more importantly, other DeFi rules can be used with these functions and redeem or activate tokens as needed.

The following sections compare the different types of legal exchanges.

Decentralized order book exchange

Decentralized order book exchanges can be used in several ways. They all use smart contracts to solve business problems, but there are significant differences in keeping order books. It is necessary to know the difference between books in-chain and off-chain orders.

Chain order books have the advantage of being completely fair. All orders are stored in a smart contract. Therefore, there is no need for additional construction or other owners. The downside to this method is that all operations require a blockchain operation. As a result, this process is expensive and slow, and even words of business acumen can affect network costs. This disadvantage is even more expensive, because the market does not change and must be decided regularly.

For this reason, many decentralized business processes rely on off-chain orders and only use the blockchain as a payment layer. The output of the order is owned and edited by a third party intermediary, commonly referred to as the intermediary. They provide the recipient with the information they need to select the appropriate order. This approach reveals some of the golden mean and addictions, but the role of the average person is limited. The intermediary does not control the money and is not consistent or does not complete the order. They can only provide a link to the quote and pay for the service. Opening up the process increases the competitiveness of the average person and reduces the potential for success.

The key contract that uses this method is called 0x, which uses a three-step conversion process. It examines the orders and selects one of the orders, and third, the recipient signs the order and sends it to the smart contract, triggering an atomic exchange of crypto assets.

regular business enterprises

One Mutant Forex Trading (CFMM) is a smart contract organization that holds (at least) two crypto assets as storage and allows depositing tokens of one type to withdraw token of another type. To determine the exchange rate, intelligent liquid entrepreneurs use different materials of the solid structure of the product. Here, the relative value is based on the comparison of smart token contracts. Cash pools using this method are not depleted because tokens become more expensive as reserves are depleted. If the token supply of one of the two tokens is close to zero, the relative value increases indefinitely.

It should be noted that throughput in a smart contract does not depend on external data rates (called oracles). When the market price of assets changes, who can trade tokens using the arbitrage method and smart contracts until the price of lake water is linked to the current market value. The impact of the unchanged commodity buy-sell spread (including low prices) could lead to further gains. Anyone who donates water to the pool can participate in that pool by receiving shared tokens and exchanging tokens for participants in their pool. Examples of smart contracts include UniSwap, Balancer, Curve, and Bancor.

Aggregation of reservations by contract is smart

Other options include revenue from smart contracts, allowing large vendors to go online and advertise the value of a particular business. The user who wishes to exchange the x token for the y token can submit the request to the smart card. Contracts intelligently compare prices from any business supplier, accept the best and most complete deals for you. It acts as a gateway between consumers and resources, enabling best practices and atomic solutions.

Compared with the smart contract-based pool performance, the aggregation-based smart contract, the value is not determined in the smart contract. Instead, the price is set by the liquid supplier. This approach works well when the financial aid provider has great potential. However, if there is a limit or lack of competition in a particular market, this approach can increase the risk of collisions and monopoly costs. As a measure against this, centralized storage systems often have some (centralized) control over procedures, such as the highest or lowest cost of financial service providers. In some cases, financial service providers may only participate after a self-assessment, including a KYC (Know Your Customer) certification.

The best-known application of this concept is the Kyber Network, which works as a backup process for various DeFi applications.

Point-to-point protocol

An alternative to the conventional exchange or liquid-liquid model is the relationship-to-peer (P2P) protocol, also known as the over-the-counter (OTC) process. It only relies on a two-step approach, where participants can contact parties wishing to trade a pair of cryptocurrencies on the network and then trade prices back and forth. Once the parties agree on a price, the exchange takes place between the chains of the smart contract. Unlike other agreements, only the parties participating in the negotiations can accept the request. Specifically, when looking at mempool's trade refusal, it is impossible for someone else to accept the acknowledgment before someone else.

To improve performance, the process is usually automated. An off-chain indexer can also be used for peer-to-peer search. These indexers act like catalogs where people can promote their target niche market. These indexers are only used to establish a connection, and the value is always the point of the conversation. AirSwap is the most popular point-to-point distribution protocol application.

Decentralized lending platform

Lending is an integral part of the DeFi ecosystem, and there are many regulations that allow people to borrow and lend crypto assets. The uniqueness of decentralized lending platforms is that lenders or borrowers do not have to identify themselves. Anyone can access the platform and benefit from a loan or a share of the proceeds. Hence, DeFi loans are completely unlicensed and not relationship-based.

There are two different ways to prevent loans and prevent their depletion. The first is to extend credit when you need to atomically repay the loan. Same blockchain exchange. Assuming the borrower does not repay the money (+ interest) at the end of the trading cycle, the trade is canceled and all profits (like the loan itself) are returned. . These flash loans are interesting but also very experimental. Flash libraries can only be used for atomic payloads and all applications in the chain, but are great new tools for portfolio arbitrage and restructuring. Hence, it should be an integral part of DeFi loans.

Second, the loans can be secured by personal property. The goods are sealed under a smart contract and are not released until the expenses are reimbursed. There are three main types of mortgage lenders: affordable loans, affordable loans, and P2P business loans. One type of lending activity is borrowing using newly created tokens, while lending activity uses existing tokens and requires a comparison of loans and mortgages.

banking position

Some DeFi apps allow users to create non-existent tokens, which allows them to provide new tokens saved by proprietary devices. To generate these tokens, the cryptographic device must be connected under a smart card. The number of tokens that can be generated depends on the target value of the tokens created, the value of the crypto property used to make the product, and the target interest. The newly designed tokens are basically all loans, requiring no business involvement and allowing users to acquire assets while running the business from the stock market. Loans can be used for fraudulent purposes, allowing them to overcome temporary financial problems or obtain additional crypto assets for the effort.

Taking MakerDAO as an example, this is a legal classification for providing stability coins pegged to the US dollar. First, users deposit ETH into a smart card classified under the Financial Conduct Act (CDP) (or Financial Conduct Act). Subsequently, the property was closed calling for a contract which created and removed part of Dai. The current system requires a minimum lending rate of 150%, which means users can generate up to 66.66 Dai for $ 100 on ETH linked to the contract. Each Dai voucher must pay a fixed price, which should meet the requirements of the highest interest rate in the suspended Dai business contract. The fees are set by the community i.e. MKR token holders, and MKR is the managed token of the MakerDAO project. In order to close the mortgage debt, the owner must send the suspended key and the interest on the contract. When the debts are paid off, a smart contract allows the owner to recover the asset. If the borrower does not repay the debt or the loan rate is less than 150% of the default, then all the loans on the loan are risky and the smart contract starts to fail to market products at a discount.

A portion of the interest and reimbursement charges are used to "damage" MKR, thereby reducing all of MKR's products. In turn, MKR holders must bear the brunt of negative shocks to ETH prices, which could make the action short enough to hold private assets pegged to the US dollar. In this case, the new MKR is designed and sold at a reduced price. Therefore, health management is the top priority of MKR holders.

Although the MakerDAO system is generally decentralized, it relies on price oracles and therefore has some dependency. MakerDAO recently moved to a multi-stakeholder strategy with the goal of streamlining the process by enabling the commercial use of multiple encryption devices.

business loans

In addition to creating new tokens, you can borrow existing crypto assets from others. For obvious reasons, this approach requires protesters with a preference for resistance. This means that in order for one person to be able to borrow ETH, the other must be willing to borrow ETH. Lenders are responsible for making sure that there is no risk to both parties and protecting the lenders, and the property is always locked in a smart contract. Loans and expenses can be matched in several ways, the main categories are point-to-point and structured.

The P2P comparison means that a lender is lending cryptocurrency on special loans. Thus, lenders do not start earning interest until after capitalization. The advantage of this method is that all third parties agree on the timing and function of the interest.

For group loans, different interest rates are used depending on the material and the demand. All borrowers have focused on smart mortgage deals, and lenders have started to benefit from them when depositing into the pool. However, the interest depends on the use of the swimming pool. When the income is easy loans are cheaper and when demand is high loans are higher. Another advantage of loan pools is the ability to adapt to changes in growth and size while maintaining high interest rates for borrowers.

Decentralized derivatives

Decentralized derivatives are tokens that benefit from the performance of an asset, the outcome of events, or the exchange of other variables. Usually you need an oracle to keep up with these changes, so point out a few intermediate locations and point out the dependencies. Expectations can be lowered when derivative contracts use a variety of independent data.

Decentralized derivatives are divided into asset derivatives and outcome-based derivative tokens. When the value depends on the performance of the token, it is referred to as the token-based token number. While the price is a function of the value of the difference greater than the performance of the asset, it is said to be an event-triggered derivative token.

Asset-based derivative tokens

Asset-based derivative tokens are a continuation of the debt value model, allowing the publication of electronic assets in response to changes in the value of various assets, without being limited to the advertising of fixed assets related to fixed assets in US dollars. Examples include tokenized versions of trading products, precious metals, and other crypto assets. The higher the volatility, the greater the downside risk than the special lending rate.

Synthetix is ​​a popular derivative token platform whose application increases or decreases the total cost of each participant based on the total cost of all large synthetic devices. This ensures that tokens with the same assets below are always interchangeable. This means that the buyback is not dependent on the supplier. This design also allows users to take more risk when casting tools. This is because your expenses are affected by someone else sharing the assets.

There is a particular example of a return token, which is an inheritance-based token number. In this case, the value is determined by the inverse function of the performance of the underlying asset within a given range of values. Reverse tokens provide users with short to crypto assets.

Event-based derivative tokens

Disclosure-based receive tokens can be used to observe differences with known procedures for occurrence, observation planning, and analysis capabilities. Anyone can register 1 ETH on a smart card to purchase all sub-tokens for an event. All sub-tokens include 1 sub-token for each event. Sub-tokens can be redeemed separately. When the market is stable, the smart contract's crypto assets are distributed to the key holders who receive the result. So, in the absence of market distortion, the ETH value of each token should match the probability of the event.

In some cases, these predictions can be based on an estimate of the distribution of what will happen in the future. However, the market valuation (and the cost) depends on the reliability of the investment resources of the analysis. As a result, results-oriented tokens indicate external dependencies and can be negatively affected by bad journalists. Potential setbacks include skeptical or skeptical issues, incomplete results that can lead to the issue going unresolved, and the choice of skeptics or skeptics.

Augur is the most popular app with lots of step-by-step solutions and adoption processes that reduce the reliability of an ad. If the sign carriers disagree with the reporter, they will start arguing and eventually come to a positive result.

Chain asset management

Like traditional investments, the silver in chains is often used for a variety of applications. This allows users to invest in heirloom tokens and use different strategies without having to manage different tokens. Compared to traditional silver, the chain difference does not require a keeper. Instead, crypto assets are locked into smart contracts. Merchants can withdraw or withdraw funds without losing control of funds and monitor the smart contract balance token at any time.

Smart contracts are set up to follow a variety of simple strategies, including switching between half-weights and different industries using a moving average. Alternatively, you can select one or more CFOs to manage your finances. In this case, smart contracts can force companies to adhere to pre-planned strategies and follow the best interests of investors. In particular, the custodian of the heritage can only comply with all the rules and risks set out in the smart contract. Smart contracts can be made on chains to solve a wide range of issues between owner-agent and integrated regulators. Thus, the management of the chain's assets makes it possible to reduce investment costs and transaction costs.

When a trader trades money in the chain, this smart contract sets up the token and transfers it to the trader's account. These tokens represent part of the ownership of the funds and allow the token holders to redeem or withdraw their stake in the assets. For example, if a trader has 1% of the tokens, that person is entitled to 1% of the crypto assets. If the trader decides to close the investment, the tokens will be burned, the lowest investment will be sold on the stock exchange, and the trader will receive an equal share of ETH from their baskets.

There are several ways to implement the on-chain financial system, each limited to ERC-20 and Ethereum tokens. They also rely on reliable pricing and third party contracts to borrow, trade, and include low cost equipment, usually Dai or USDC stable.

Enzyme Finance and Set Protocol allow anyone to start new businesses. Enzyme Finance is focused on building real estate for capitalist companies that use smart contracts as regulators to help executives comply with their financial strategies. These smart contracts rule the white and black names of consumers and assets, with trade restrictions like maximum, price tolerance, etc. The same goes for money received on time.

Tuning protocols are primarily designed for semi-automatic entries with deterministic portfolio rebalancing caused by preset thresholds and lock-in times. However, these procedures are also applicable to control. Betoken serves as the capital's governing body by a community of elite property managers. The more efficient the financial managers, the greater their impact on the future of capital allocation. UniSwap's liquidity pool also exhibits some characteristics of the investment chain. Non-tradable commodities have created incentives for a new semi-automatic commodity weighing, while exchange rates offer negative returns to investors.

The Yearn Vault is an investment organization designed to raise money from an asset. The strategies vary, but often require different steps and controls. Often these measures are too expensive (based on exchange rates) for low costs. He also wants investors to be cautious and cautious. Yearn Vaults mitigates this problem by leveraging collective intelligence and distributing network costs proportionately among all participants through integration. However, the deep integration of processes also shows important implications.

time and risk

time

DeFi can improve performance, transparency and easy access to financial applications. The composability system also allows anyone to combine multiple applications and processes to create new services.

useful

While most financial institutions have historically been trustworthy and trustworthy of centralized organizations, DeFi is replacing some of these trusts with smart contracts. The contract may be the responsibility of the supervisor, the tutor and the CCP. For example, if both parties wish to trade digital assets in the form of tokens, a CCP collateral is not required. Instead, these two changes can be decided. That is, both switches may or may not be running. This reduces the risk of the loan companies and makes the financial system more efficient. Low reliability can lead to additional benefits by reducing administrative burdens and reducing the need for third-party inspections. Similar results can be achieved in almost all areas of financial infrastructure. In addition, a token exchange is faster than a change in a traditional financial system. Fast switching and exchange rate can be further enhanced by Layer 2 solutions such as side chains or a payment and government channel network.

transparent

DeFi applications are transparent. All changes are visible to the public and smart contracts can be identified on the channel. Observability and deterministic practice allow unprecedented transparency, at least in theory. Financial information is made public and can be used by both scientists and users. In times of crisis, having historical (and current) data has improved dramatically compared to traditional financial processes. Much of the information in the normal financial system is held in a number of proprietary databases or not available at all. . Thus, the transparency of the DeFi application can help to minimize unwanted events before they occur and to understand their origins and can occur when they occur earlier.

valid

Basically anyone can use the DeFi protocol. Thus, DeFi can create an open and financially viable environment. In particular, the demand for building materials is low and the risk of discrimination based on non-compliance is low. For security tokens, for example, if the rules restrict access, these restrictions can be applied to the token grant without compromising the integrity and delivery of payment procedures.

Configurability

The DeFi process is often compared to Lego bricks. A co-payment layer enables rules and associated applications. Chain fund contracts can be used for business contracts or mortgage agreements to carry out a work business. You can combine, branch, or repeat two or more items to create something new. Anything that has been created in the past can be used by individuals or other smart contracts. This change sparked unprecedented interest in open source engineering and potential expansion.

dangerous

DeFi also carries some risks, such as smart contract completion risk, operational security, and reliance on other external policies and data.

Smart promises kept

While the accuracy and completeness of smart contracts is good, there is a risk of error. If there is an error in the coding, these errors can create loopholes that allow attackers to remove money from the smart contract, create confusion, or cause fraud. The procedures are not valid. Users should be aware that the security of the process depends on the smart contract behind it. Unfortunately, the average user cannot read the contract code, let alone a security measure. Inspection, insurance coverage and legal evidence are some of the solutions to this problem, but uncertainties remain.

Similar risks exist in the performance of a contract. Users often do not understand the payment information that needs to be signed as part of an exchange and can be confusing with future interventions. Unfortunately, there seems to be a trade-off between usability and security. For example, some decentralized blockchain applications allow sending unlimited tokens on behalf of users. This generally makes future changes easier and more efficient. However, this permission puts the user's money at risk.

safety at work

Many DeFi protocols and applications use control keys. This key allows a predefined group (usually the main task group) to execute the contract and perform an emergency stop. It is understood that certain operations require the implementation of these precautions and the control of certain variables, but the presence of these keys can be problematic. If an insecure theme owner creates or stores keys, a malicious third party can obtain those keys and break the smart contract. In addition, key members of themselves may be tempted by malice or vital financial support.

Most operations attempt to reduce this risk by increasing the number of signatures and closing hours. Multisig requires M-of-N keys to perform smart contract management functions, and time locks indicate that the first operation can be performed (completed).

As an alternative, some companies rely on polling stations where their managed tokens give owners the right to vote for the future of the contract. However, in general, management tokens are held by a minority, with the same effect as management keys. Some works seek to reduce this option by rewarding the first consumers and users who meet certain requirements, using simple procedures of involvement in the voting process and other symbolic guarantees (extraction of liquidity). However, even if the statement is considered "fair," the actual distribution is usually still significant.

Token management can be undesirable. When these rules are symbolized, the greater support of power can become more problematic. Without time acquisition, a mediocre developer can put all their tokens into the CFMM, resulting in huge setbacks and increased project reliability. In addition, the mining industry can lead to the growth of centralization by allowing well-established processes to hold a significant portion of the tokens for managing new processes. This can create large meta-processes where key holders control a significant portion of the DeFi infrastructure.

Success

The best feature of the DeFi ecosystem is its openness and integration. These capabilities allow multiple smart contracts and decentralized blockchain applications to interact with each other and deliver new services based on a combination of existing services. However, these interactions also lead to great dependencies. A problem with smart contracts can have a huge impact on many applications across the DeFi ecosystem. Additionally, an issue with Die Stabilitycoin or ETH price shocks can cause chain disruptions across the entire DeFi ecosystem.

For example, an ETH entrepreneur is required under the MakerDAO contract to provide Die Stabilitécoin, and Die Stabilitécoin is locked into a smart loan contract to provide interest, the result of which is called cDai. The cDai tokens will be sent with some ETH to the UNISwap ETH / cDai liquidity pool to withdraw the UNI-cDai tokens representing part of the liquid pool. Any additional smart contract increases the risk of errors. UNI-cDai tokens can become invalid if the contract is not fulfilled. The "token on token, token on token" problem creates volume tokens and can disrupt operations in a way that theoretical transparency does not match reality.

external data

Another point to note is that many successful contracts rely on external data. When the smart contract depends on data not locally available on the chain, the data must come from an external data source. This is called oracles which indicate addiction and can sometimes lead to the conclusion of a very high contract. To reduce this risk, many projects rely on Oracle organizations with multiple data transfer processes.

violence

One concern for administrators is that cryptographic artifacts can be exploited by people who wish to avoid shutdown and surveillance. Although DeFi the truth is not appealing to this application, the network pseudonym can provide some privacy. However, that doesn't have to be bad and the situation is more difficult than it seems at first glance. On the other hand, people with prejudices can abuse false names. On the other hand, privacy may be the best option for legitimate financial apps. Therefore, managers need to think carefully and work hard to find effective solutions so that they can step in when needed without disrupting new developments. People should also be aware that managing cooperation is not possible.

While the question remains as to whether regulators can (or should) oversee business processes, there are two areas that deserve special attention: legal entry and exit and the fact of decentralization.

Good entry and exit ramps reflect the traditional financial process. People are still required to go through financial service providers to transfer assets from their bank accounts to blockchain based systems etc. These financial service providers are regulated and require a background check of their finances.

Likewise, it is important to distinguish between legal contracts and plans which claim to be only decentralized but are in fact managed by an organization or a minority. The old can give the new the value of happiness and can take away some hope, while the latter can reveal the worst of both worlds, the reality of dependence on people working in the middle with a minimum. of care. With this in mind, administrators should carefully monitor and carefully identify whether the provision of the DeFi protocol is having a real impact or whether the DeFi label is intended for release.

scalability

Blockchain responds to the ultimate balance between distribution, security and scalability. Although the Ethereum blockchain is widely regarded as robust and secure, it has struggled to meet the overwhelming demand for blockchain. Rising oil prices (exchange rate) and long term warranty terms affect the DeFi ecosystem and benefit the rich who can do big business.

The ability to solve this problem includes both multilayer and multilayer solutions 2 such as advanced methods, zero-knowledge integration (ZK) and fine-grained integration. Most of the time, however, strong scalability has led to two of DeFi's most important characteristics: integration and industrial atomicity. On the other hand, moving DeFi to a broader base level doesn't seem like a good idea as it has resulted in significant inefficiencies. It therefore remains to be seen whether a real impact blockchain can meet demand and lay the foundation for an open, transparent and non-volatile financial infrastructure.

Therefore

DeFi offers exciting opportunities and the possibility of creating a truly open, transparent and unchanged financial infrastructure. Because DeFi has so many integrations and apps, anyone can see every change, and users and researchers can use the data to analyze it anytime.

DeFi has created a wave of innovation. On the other hand, manufacturers are using smart contracts and payment processes to boost the reliability of traditional financial devices. On the other hand, they are developing a whole new financial product that would not be possible without a public blockchain foundation. Atomic swaps, stand-alone liquidity pools, decentralized stability coins and flash loans are just a few examples of the enormous potential of this ecosystem.

While this technology has great potential, it also comes with certain risks. Smart contracts can have security issues that allow improper use, but scalability issues can limit the number of users. In addition, the word "decentralization" can sometimes be misleading. Many policies and applications use external data and special keys to control systems, execute smart conversion contracts, and even shut down emergencies. While this shouldn't be a problem, users should be aware that in many cases this leads to a lot of trust. However, if these issues can be resolved, DeFi could drive changes in the financial sector, resulting in a stronger, more open, and more transparent financial infrastructure.