Topic: How Decentralized Finance Came to Be (Read 276 times)

There are a lot of problems in the modern world, some of them are banks and censorship.
The Defi ecosystem will soon be operational and will replace many banking functions. Everyone anywhere in the world will be able to attract investment for their business or invest in any other by pressing a few keys on the keyboard.

Another project is being created to combat censorship:
https://medium.com/@gavofyork/why-we-need-web-3-0-5da4f2bf95ab

These technologies should dramatically change the world in the next 10 years.
We should not be lazy and explain to all beginners in simple words how it all works.

Not true, now many centralized exchanges list scam. Latest example: https://coinmarketcap.com/currencies/yam/

This is a very dynamic market and there will be a lot of fraud on it, so you need to constantly acquire new knowledge and monitor projects

2 example, when traders buy an asset without studying the information:
https://bitcointalksearch.org/topic/m.54993243

No need to blame Ungiswap and other decentralized exchanges, trade well-known cryptocurrencies on trusted exchanges.
But you want x100-x1000? And this only happens on new projects, 99% of which are scam or will close after a while.

This is inevitable and should have been expected

Literally thousands of shitcoins have sprung up everywhere after the success of Bitcoin and a few genuine altcoins like Ether. They were mostly fake and died out eventually but they still proved one thing, that is, the value of the technology, even if that hadn't been the intention of their masters. In the same vein, the amount of scam tokens and services they offer prove the value behind DeFi. Really, would anyone give a slightest fuck about creating copycats and fakes if there were no real value behind this stuff? Highly unlikely, if you ask me

I have the same opinion with you, more less. We need Decentralized Finance because we want to take full control of our money.
To date, most people's money are controlled and managed by central point like banks.
Decentralized Finance can be achieved using decentralized currency, that is cryptocurrency.
But how about high volatility in cryptocurrency ? Don't worry, stable coins are the solution.

Presently there are rumours of scam projects surrounding uniswap exchange presently and the number of scam tokens and coins on uniswap is rising almost every week, I just feel like Centralized exchanges are better since they do research on projects before listing them but not uniswap or decentralized exchanges

We can see three stages or eras in the history of blockchain technologies. The first began when Bitcoin and its likes like Litecoin emerged that were meant only as a value transfer vehicle and, hypothetically, "a peer-to-peer electronic cash system". Okay, we can now move money, or what goes for money, around in a trustless and decentralized way

The concept of smart contracts that materialized with the creation of Ethereum was the next step or even leap forward. But smart contracts are of no great use on their own until something useful can be done with them in the external world. Now we see the expansion of decentralized services, though not necessarily financial, but using this tech under the hood

And then it would be extremely intriguing to see where it is going to take us

Decentralized finance services if kept growing like they are doing now they will definitely become a threat to traditional banking and financial system. I fully support DeFi projects and i would like to see more and more products in this sector just like we get real life banking and investment services.

A very substantial, very informative and very up to date information that you have share to us knowing these information broadens our mind to all the concepts behind Defi or Decentralized Finance.

Yes, that's interesting to me too

And right now we are discussing an article delving extra deep into the details of how AMMs are working and explaining its principles, i.e. how it is possible to find a market equilibrium with liquidity pools in a decentralized way (what DeFi is about). Anyway, I will likely post a short write-up on my own a little later

Most Defi projects, usually launch through uniswap and most times, their identities are hidden and most do scam, even the ones that lock liquidity have been found to print more coins and dump dry the liquidty. Although CEX could be use for the DEFI project launchpad. I have made good money from Defi luanched on uniswap, I currently trade some of the profitable projects with good use cases.

uniswap is an exchange and not some launchpad for defi projects. so not sure if you're using the right words here since i don't see it was mentioned on the op either.

this is interesting. how do this we achieve this equilibrium? as far as i can see, with the current set up of providing eth+some tokens pool, it could serve as a selling depth but there is no buy pressure created when you do this.

Thanks for this, You didn't break down some terminology and ilustration like using the known to describe the unkown. Defi projects seem to be driving this bull run, but bitcoin traders must be careful not to use all their finance on uniswap DEFi projects as many are nothing but scams. This is the future banks saw that made them shiver.

Another interesting case of DeFi which I simply didn't have enough space to include in the article is an idea of automated market makers (AMM) as deployed by decentralized exchanges and protocols like Bancor, Band or Uniswap. What makes them interesting is the use of smart contracts in the way somewhat similar to crypto-backed stablecoins (read, MakerDAO's DAI), though for a different purpose. The main idea behind the AMMs is finding a price equilibrium based on a liquidity pool instead of a regular order book as done in a centralized exchange like Bitfinex or Binance

But the concept may be a little too challenging to wrap one's head around at one go

My new article published on stealthex.io. Share your thoughts and ideas below (but please avoid overquoting at all costs)

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Decentralized Finance (DeFi) can be rightfully considered a third revolution in the crypto space. If you wonder what the first two are, these are the invention of blockchain itself along with the technology's firstborn, Bitcoin, and the inception of the smart contract tech. Just like blockchain provides the basis for smart contracts, the latter give rise to DeFi. It is often said that smart contracts are poised to revolutionize the ways both humans and organizations interact in their contractual relationships. In this sense, DeFi is the stage where these relationships are set to emerge and develop. With a bigger picture in mind, it is the world that the blockchain technology lays the foundation for, while smart contracts help to build it. Why we need DeFi, how it is possible, what makes it tick and click are the main themes of this article.

But seriously, why do we need it?

As most financial services in existence today are provided by or involve third parties, for example, banks, exchanges, investment companies, insurance agencies etc, DeFi is an attempt to build an alternative environment, an ecosystem of applications offering the same set of services but now powered by public blockchain networks in a decentralized, transparent and permissionless way. By and large, the basic idea that guides DeFi is essentially the same ethos that drives innovation with crypto as such, but at an entirely different level.

Just like cryptocurrencies try to wrest the state supremacy over money from the hands of rogue governments and central banks, DeFi takes it further and aims higher. With DeFi, it is no longer a matter of creating a coin in an effort to replace fiat money, which mostly doesn’t work anyway. However, building a whole new domain of financial services available fairly and squarely to anyone, with full control over the assets but without corrupt governments and greedy intermediaries sticking around, may pan out better after all.

So, answering the question posed at the beginning of this section, we need DeFi for basically the same reasons we need cryptocurrencies. Or, put differently, if we need cryptocurrencies, an assumption that has been proved indisputable, it is inevitable as well that we will sooner or later become interested in decentralized financial services powered by these cryptocurrencies through smart contract blockchains. We can’t just create Bitcoin and say that’ll do. It is a natural development, a Maslow's hierarchy of needs, in a sense.

How is it ever possible?

As mentioned in the introduction, DeFi emerges thanks to smart contract tech and decentralized applications (or simply dApps) running them. So how does it work in practice? To better understand the idea, let’s take a closer look at a relatively simple example of a decentralized crypto-backed stablecoin which can be created through a smart contract. Stablecoins are coins whose value is pegged to a stable asset such as a commodity like gold or a fiat currency like the US dollar.

There are a few different types of stablecoins that exist in the wild. For the purpose of this exposition, we are interested in crypto-backed stablecoins. Like stablecoins collateralized by fiat, these stablecoins use cryptocurrencies as collateral. However, the key difference is that a fiat-based stablecoin is pegged to the fiat currency which is backing it up. Kinda obvious. A crypto-backed stablecoin, on the other hand, is pegged to one asset, say, the American dollar, but backed up by a completely different one, for example, Ether. Things get tricky.

A crypto-collateralized stablecoin is possible through the magic and the beauty of the smart contract governing it. If the price of such a stablecoin rises above its peg, or parity, you can create more stablecoins and sell them at a premium. If the price of the stablecoin falls below parity, you can buy stablecoins and liquidate them at a discount. If the collateral itself crashes, undercollateralized stablecoins will be liquidated with their collateral now backing up fewer stablecoins. As a result, the price always gets pushed back to parity.

And all this rather complicated stuff is done on the blockchain in a decentralized and automatic fashion with no banks or other third parties involved. Consequently, more services are easily possible too. And quite a few at that.

Okay, what decentralized financial services are available?

Well, one such service we have just described above. Cryptocurrencies are infamous for being extremely volatile, and stablecoins are designed to deal with this issue. There are many stablecoins out there like Tether, TrueUSD, or Gemini Coin, but they are all based on trusting third parties. Easily one of the best known crypto-backed stablecoins is MakerDAO’s DAI, which is pegged against the US dollar with a basket of crypto-assets as collateral in a truly decentralized and trustless way, that is, a blockchain way.

Crypto-based stablecoins can be used on their own by offering a hedge against the price volatility of such popular cryptocurrencies as Ether or Bitcoin. Aside from that, they are also instrumental in other DeFi services, for example, in decentralized exchanges like IDEX or BiKi.com. With stablecoins, it becomes possible to create fiat trading pairs in addition to crypto ones in entirely decentralized, non-custodial trading environments as opposed to centralized exchanges like Bitfinex or Binance, which are vulnerable to high-profile hacks and personal data leaks.

Unlike MakerDAO, Ampleforth doesn’t strive to create a rock-solid stablecoin. Instead, it comes up with the notion of “adaptive money built on sound economics”, with its mission stretching out as far as to marry “the scarcity of Bitcoin with the elasticity of fiat”. It tries to go beyond the relatively simple concept of a stablecoin and brings forth the idea of elastic money supply that can expand and contract depending on market demands, as well as allow the creation of a valid form of collateral for DeFi based on that idea.

Obviously, DeFi is not just about stablecoins or the financial services using them. Blockchain-based borrowing and lending is another important DeFi arena. With platforms like Compound, dYdX, Dharma, you can deposit your crypto assets to either earn interest on them or use these assets as collateral for borrowing. Smart contracts automatically match borrowers and lenders, offering dynamic interest rates based on supply and demand. And with tools like LoanScan, you can also easily shop around for the best interest rates on the block.

These examples are far from exhaustive, of course, as the space is rapidly expanding and evolving. However, there are some fundamental issues that put grit into the wheels of the DeFi war machine.

So where’s the catch?

There are many advantages of DeFi, but to be of any practical use, it needs up-to-date information that would be reliable and authentic. Smart contracts that DeFi is based on are hopelessly on-chain, but the data they need for processing is mostly off-chain. Without a bridge to close this gap between a smart contract and its source of external information, smart contracts are entrapped in closed-off dungeons of their blockchains. To be sure, no crypto-based stablecoin is going to work correctly without a real-time price feed for the assets taken as its collateral and used for maintaining the peg.

To get around this roadblock, a concept of blockchain oracles has been suggested. But as the chain cannot be stronger than its weakest link, blockchain oracles seem to be that weak link in the field of DeFi and beyond as obtaining information in a verifiable way can be an intimidating task. What approaches dApps are taking to procure and verify sources of truth in the external world is the topic of our upcoming article about blockchain oracles. Stay with us and stay tuned!