How will DeFi redefine the future of global finance?

Block Tianyan APP News: Decentralized, peer-to-peer, borderless digital assets and open networks provide a promising alternative to traditional currency and value transactions-but the real economy of decentralized finance (DeFi) What is the meaning? How will it shape the future of global finance?

In many ways, DeFi can provide us with an early window into the future prospects of global finance. With the total value of assets locked on the DeFi platform exceeding US$40 billion, it now seems that more and more users are paying for the unique features of DeFi: high yield, liquidity, flexibility and transparency.

Shaping the financial future under the new normal

Although some people may refer to income derived from yield farming or liquidity mining as passive income, I prefer the term “coded income” because DeFi income is hard-coded into the smart contract. Although the DeFi rate of return is paid in highly volatile tokens, its return is usually significantly higher than that of centralized wealth management products.

Interoperability is the core concept of the DeFi field. The flexibility of the DeFi platform comes from the composability of the technology stack. In this technology, new DeFi services are developed based on previous tools. These “money Lego toys” are reminiscent of toys that were popular in childhood, allow the ecosystem to benefit from personal progress, and encourage the steady development of new agreements and platforms in the space. In addition, since the DeFi smart contract code is open source, the mechanism of the tool is visible to everyone-this increase in transparency is a major improvement compared to the traditional black box style adopted by many centralized financial services.

Global finance is undoubtedly affected by new technologies and data-driven applications, which makes it easier than ever for millions of investors to trade. Due to the digital leap brought about by the new crown pneumonia epidemic, this situation is more obvious than ever. Although the transaction volume of DeFi is still a small part (but growing rapidly) compared with the transaction volume of the global credit and financial markets, its main impact is to make new products and strategies available to everyone.

Limited by code: Challenges and limitations of DeFi

Most DeFi tools have replicated financial models over the years, but in reality they are mainly reserved for hedge funds that have access to both capital and technology. With the help of DeFi, retail investors can now have direct and unrestricted access to complex trading strategies that they could not experience before. Similar to Bitcoin (BTC) which has revolutionized the traditional financial system that has a history of hundreds of years, once the door is opened, it cannot be closed.

Limited by code: Challenges and limitations of DeFi

Most modern computer scientists and technological entrepreneurs who changed the world are still alive today. In this regard, even though software has become ubiquitous in our lives, programming is still considered a skill that humans have only recently mastered. The rapid development of software and the ever-changing characteristics also mean that the code will quickly become obsolete, or worse, become insecure.

This is a defect that applies to smart contract code and extends to DeFi, because smart contracts that have been deployed on the blockchain cannot be changed or easily modified. Instead, a new version of the DeFi tool must be created to replace the previous iteration, and users need to be aware of any changes or loopholes because their funds may be at risk. Although decentralized insurance solutions can be used to alleviate this situation, the risks and limitations of smart contract codes and blockchain infrastructure are still the core challenges of DeFi expansion.

Beyond the experiment: DeFi becomes mainstream

Another obstacle to getting most people to adopt DeFi is to be able to truly participate in the education required in the field. DeFi market participants need to have a solid financial foundation, or at least a basic understanding of smart contracts-if they want to manage the complexity of DeFi products. Although traders and investors often have limited understanding of the functions of the financial instruments they invest in, this is a more sensitive issue for DeFi, because investors need to be free of any centralized barriers for risk isolation Directly interact with financial instruments. As a person who believes in the benefits of decentralization and the motivation of high returns, the author believes that these problems can be overcome. However, the cost for new users to learn a bitter lesson is precisely what regulators want to avoid.

In addition, due to the general lack of KYC/AML in the entire field, the flexibility and super-liquidity of DeFi assets can be attributed to reduced friction. The encrypted wallet connected to the browser is enough to “post”, and then use and switch a large number of DeFi platforms, these platforms will automatically identify the encrypted assets of your wallet. Adding a KYC/AML layer to these platforms will definitely affect transaction speed and the overall efficiency of DeFi-based trading strategies.

However, the actions taken by the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) in the U.S. and the EU’s proposed crypto asset market (MiCA) regulations are just a few examples, indicating that governments do not intend to let the future of global finance fail. Supervised. In this sense, the author expects that a regulated DeFi ecosystem will eventually emerge, this system is likely to be operated by mature, licensed companies and used by accredited investors-this is in line with the current open model Obvious difference.

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