12-1. DeFi

DeFi

DeFi

Defi

• open and global financial system - alternative to the traditional financial system
• gives you control and visibility over your money
• gives you exposure to global markets and alternatives to your local currency or banking options
• open to anyone with an internet connection and Defi largely owned and maintained by their users
• DeFi market always open and there are no centralized authorities
• system is handled by code that anyone can inspect and scructinize so it's automatic and safer

DeFi in Layers

• Blockchain: ethereum or other blockchains contain the tx history and state of accounts
• Asset: currencies like ETH
• Protocol: smart contracts that provide the functionality
• Applications: the products we use

 

DeFi vs Traditional Finance

Problems of Traditional Finance

• Some people aren't granted access to financial services
• Financial services have your personal data
• Centralized institutions can close down markets at will
• Trading hours often limited
• Money transferse can take days
• There's a premium to financial services because intermediary institutions need their cut

DeFi	Traditional Finance
You hold your money	Your money is held by companies
You control where your money goes and how it's spend	You have to trust companies not to mismanage your money
Transfers of funds happen in minutes	Payments can take few days due to manual processes
Transaction activity is pseudonymous	Financial activity is tightly coupied with your identity
DeFi is open to anyone	You must apply to use financial services
The markets are always open	Markets close because employees need breaks
It's built on transparency	Financial institutions are closed books

 

 

DeFi in Bitcoin & Ethereum

DeFi and Bitcoin

• Bitcoin was the first DeFi application
• let you really own and control value
• large number of people who don't trust each other agree on a ledger of accounts without the need for the trusted intermediary
• open to anyone, no one has the authority, rules are written into the technology

DeFi and Ethereum

• Programmable money: programmable digital money using smart contracts
  • anyone can program logic into payments
  • you can get the control and security of Bitcoin mixed with the services provided by financial institutions
  • do things with cryptocurrencies that you can't do with Bitcoin
• Ethereum is the perfect foundation for DeFi
  • no one owns Ethereum or the smart contract -> everyone can access DeFi service, no one can change the rule
  • DeFi products speak the same language: Ethereum -> many of the products work together seamlessly
  • tokens and cryptocurrency are built into a shared ledger: keeping track of tx and ownership
  • Ethereum allows complete financial freedom to users

 

How does DeFi Works

Smart Contract

• Defi use cryptocurrencies and smart contracts to provide services that don't need intermediaries
• Smart contract replaces the financial institution in the transaction and no one can alter the smart contract when it's live
• Contracts are also public for anyone to inspect and audit
• Currently, there's a need to trust the more technical members of the Ethereum community who can read code -> open source based community helps keep developers in check
  • this need will diminish over time as smart contracts become easier to read and other ways to prove trustworthiness of code are developed

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Use Cases of DeFi

Send Money around the globe quickly

• Ethereum is designed for sending tx in a secure and global way in minutes(usually)

Stream money around the globe

• pay someone their salary by the second, giving them access to their money whenever they need it

Borrowing with privacy

• traditional bank need to know whether you're likely to replay a loan before lending
• DeFi lending works without either party having to identify themselves -> borrowser must put up collateral
• you can borrow money without credit checks or handing over private information

Access to global funds

• you have access to funds deposited from all over the globe, not just the funds in the custody of your chosen. bank or institution
• loans more accessible and improves the interest rates

Tax-efficiencies

• Borrowing can give you access to the funds you need without needing to sell your ETH(a taxable event)

Flash Loans

• more experimental form of decentralized lending that let you borrow without collateral or providing any personal information
• loan is taken out and paid back within the same transaction. if it can't be paid back, the tx reverts
• funds are often held in liquidity pools
• a lot of logic must be included in a ver bespoke transaction -> in a single tx:
  • you borrow X amoount of ETH at $1.00 from exchange A
  • you sell X ETH on exchange B for $1.10
  • you pay back loan to exchange A
  • you keep the profit minus the tx fee
• flash loans are an example of a future where having money is not necessarily a prerequisite for making money

Lending

• earn interest on your crypto by lending it and see your funds grow in real time

Quadratic funding

• projects that receive the most funding are those with the most unique demand

1. There is a matching pool of funds donated
2. A round of public funding starts
3. People can signal their demand for a project by donating some money
4. Once the round is over, the matching pool is distributed to the projects. Those with the most unique demand get the highest amount from the matching pool

• This means Project A with its 100 donations of 1 dollar could end up with more funding than Project B with a single donation of 10,000 dollars

작은 기부금을 많이 모아 자금을 지원받은 프로젝트가 더 높은 지원을 받을 수 있다..?