Decentralized Finance Infrastructure
Decentralized Finance (DeFi) enables everyone to be part of the financial system. There is no central ruling party such as banks or governments.
DeFi is challenging the centralized financial systems. In this article we will review some of DeFi’s foundational technologies.
With the emergence of Blockchain technology, we have entered a new era of the internet. It is the internet of value or the trust protocol. A Blockchain software makes it possible for users to operate securely without trusting each other — this was impossible before without a third trusted party.
Blockchain provide privacy and security in online finance transactions. Central points of attack and failure are eliminated. It keeps a transparent record of all the transactions which are happening on the blockchain. This increases the transparency not only for financial use cases. The chances that authorities cheat in a voting system with decrease and the voters can see if the representatives are acting with integrity.
Tracking warehouse shipments would be possible with blockchain. You can have access to the supply chain from where it was manufactured until the end consumption.
Blockchain can record anything of value which can be expressed in code. Birth and death certificates, marriage licenses, titles of ownership, deeds, educational degrees, etc.
Tokens which are secured based on cryptography are considered cryptocurrencies. They are appealing because of their often limited supply, additional utilities and/or tokenomics. More people are losing their faith in government-based currencies and the crypto market seems like an exciting battlefield for traders who are looking forward to increasing their wealth. Anything which is not duplicable in the digital world can hold value.
The most popular cryptocurrency is Bitcoin which functions as a payment and store of value system. Using the Bitcoin network, users can conduct transactions across borders without the involvement of intermediaries.
Ethereum with the native token ETH is the second largest cryptocurrency in the world and its market cap is $220 billion. It was introduced by Buterin in 2014 and it’s more like an extension of Bitcoin’s applications. We can have smart contracts on Ethereum. Imagine a money Lego which can be formed the way you want at the expected time. Developers can program the money using smart contracts. Moreover, it’s a ledger to keep all the transactions which are happening.
Smart Contracts are computer programs which are able to create and transform information in the Blockchains. They can automatically execute instructions and allow peers to interact indirectly. With the use of smart contracts; there will be no need for a central clearing house anymore. The most important fact about smart contracts is that they are stored and executed decentralized. Because of this they can hardly be stopped or reverted by a government or single entity. Only stopping the whole blockchain could stop a fully decentralized smart contract.
The use cases of smart contracts are so diverse. They can be used in business agreements, in the Gaming industry, for data stewardship, in providing supply chain data and so much more.
Decentralized applications are considered the second generation of blockchain technology. All the computer applications which run on a distributed computing system are considered dApps. The more people join the decentralized financial world and the more Defi products get combined, the faster the dApps industry will grow. With the use of dApps we won’t need a central clearing house for app interactions and everything will happen on transparent smart contracts.
DAO is the abbreviation of Decentralized Autonomous Organization. It is an entity with no central power and no CEO. all the decisions are made by the community. DAOs usually have a governance token which holds voting rights and the rules will be encoded in smart contracts. An examples would be MakerDao.
Oracles are third party services that provide smart contract with external information. They can be considered as bridges between the Blockchains and the outside world. Sometimes Blockchains and smart contracts need to access trusted off-chain data; this can be a big challenge because Blockchain is a trustless technology. A good example of an oracle is Chainlink, it is a party centralized and partly decentralized network to provide trusted information such as price feeds to smart contracts.
There is a concept in the DeFi world called “The Oracle Problem” which refers to the situation in which blockchains are isolated from outside of their ledgers. This isolation reduces the utilities of the smart contract platforms.
Stablecoins are a type of cryptocurrency whose value is tied to an outside asset to stabilize the prize. These assets can be USD or gold. We have three classes of stablecoins. Fiat-Collateralized, Crypto-Collateralized and Non-Collateralized.
The largest class of stablecoins are the ones which are backed by fiat; such as USDT and USDC. They backed by off-chain reserve of the target asset and will be custodied by an eternal entity which undergoes routine audits to verify the collateral’s existence.
Crypto-Collateralized stablecoins are the second largest class of stablecoins. They are backed by overcollateralized amount of another cryptocurrency. their advantage is being decentralized and the disadvantage is the limited scalability. DAI is the most popular stablecoin of this class.
The last classification is Non-Collateralized stablecoins. They are not backed by any underlying asset. Algorithmic expansion & contraction of supply shifts the price to the peg. The negative aspect would be the lack of inherent underlying value backing the exchange of the token. We just saw Terra LUNA collapse as an example for a failed algorithmic stablecoin.
All these technologies are intertwined with each other and there is an overlap everywhere you look. They gather and build the foundation of the future financial system. There is still a lot of room for improvements, for new DeFi projects and for more partnerships. The more tech companies in these areas connect and interact with each other inside the community, the faster the mass adoption will take place. Paycer is proud to be a part of this financial revolution.
Paycer’s goal is to aggregate DeFi investments multi-chain and make them available to users without the need for their own wallet nor the expertise. This should allow anyone to generate a passive income in a world where banks no longer pay interest. Hence the Paycer team is developing a bridge protocol for DeFi and TradFi to combine the best of both worlds and make it available for retail clients #CeDeFi. Apart from the technical matters and the creation of a super easy to use final product. The goal is also to create a regulatory framework that allows the legal operation of a DeFi platform within the EU first and subsequently in other regions.
Currently, a DeFi platform is already available on paycer.finance on which Paycer tokens PCR can be claimed and staked. More features will go live soon. At the moment on Polygon but other blockchains will be integrated in the near future. Paycer is also working on a banking partnership to be able to combine DeFi with a traditional bank account. In addition to the development of the DeFi platform, the development of the final consumer product is also in progress.
Be sure to follow Paycer on social media for all the latest updates on product development. We have further exciting announcements to share very soon.
Source: Santoro, Joey, et al. DeFi and the Future of Finance. Wiley, 2021.