You may have heard about Delfi also known as decentralized finance and wondered what all the hype is about? You’ve come to the right place. I’ll address all your questions in this article:
Decentralized finance is one of the areas of cryptography that is currently receiving a lot of attention. At its most ambitious, DeFi aspires to replicate the current financial system, but without the need of any trusted middlemen such as banks.
By allowing trustless peer-to-peer payments, Bitcoin, the first decentralized network, lay the groundwork for this trend. This implies you can transmit Bitcoins to anybody in the globe without knowing or trusting them or utilizing a third-party service such as a bank. Other characteristics of bitcoin’s protocol are hard-coded in addition to these. The supply cap, which stipulates that there will never be more than 21 million bitcoins in total, is maybe the most significant. Because of its scarcity, Bitcoin is sometimes referred to as “digital gold.”
Once people recognized the power of the Bitcoin network, they immediately began thinking about how it could enable more use cases beyond simply storing the ownership status of Bitcoins
In 2013, a young Bitcoin enthusiast called Vitalik Buterin set out to build Ethereum in order to solve this problem. Ethereum is a “global computer” in the sense that it can store both code and data. Ethereum, like a regular computer, can run programs and store data on the Ethereum blockchain. The status of the blockchain is updated every time code is performed and data is modified. Unlike a typical computer, however, Ethereum’s state updates are regulated by consensus rules, and the state is distributed worldwide, implying that the data is stored by thousands of nodes collectively.
These building blocks make Ethereum an ideal candidate to host new types of applications. Applications that are:
While Ethereum may theoretically support any sort of application, decentralized finance is the area that is presently receiving the most attention. Decentralized finance refers to a group of apps that aim to take the place of banks and other financial institutions, such as trading, lending, borrowing, and investing.
When you go to your bank’s website or mobile app in conventional finance, all the app’s logistics are housed on a server managed by your bank. Your personal details and bank account balance are also saved in a database owned by your bank. This logic is turned on its head by decentralized finance. We’ll compare the advantages and disadvantages of utilizing a bank account against a DeFi app.
Your assets are maintained in a blockchain account rather than a database in decentralized finance. While your bank can freeze your assets at any point, no one can prevent you from accessing your blockchain assets. There is no way to shut down a single server. Someone would have to shut down the entire blockchain to deprive you of your assets, which is practically difficult given that it is controlled by thousands of computers all over the world.
Your account is represented by a pair of public and private keys rather than a name and a bank account number. The public key is just that: public, and it identifies you on the network (for example, when receiving payments from a friend), whereas the private key is required when sending cash to another Ethereum account. All transactions are verified by miners, and only those with legitimate digital signatures are validated.
It is totally free to create a blockchain account. You can set up a node and produce as many addresses and accounts as you like if you’re tech-savvy. The majority of users, however, create accounts using an Ethereum wallet. Wallets are user interfaces that make interacting with and communicating with the blockchain relatively simple. A public key and a private key are generated automatically when you download and set up a wallet. When you transmit money to another address, your wallet creates the appropriate signatures and sends the transaction to the blockchain, where it is processed and verified.
Unlike a bank account where you must identify yourself, no one will deny you an Ethereum wallet. They are all free and open-source.
Another distinction between an Ethereum account and a bank account is that the former allows you to choose your own interface.
You can download an Ethereum wallet, copy the private key and then import it into another wallet application, and you will see your balance immediately appear in the interface. Imagine being able to import your bank account into the banking application of your choice and switch from Société Générale to Boursorama in seconds. Because a wallet is simply an interface that reads the blockchain, this is a reality in the crypto world. This blockchain is open to the public and may be accessed by anybody.
It’s just as easy to go from one DeFi app to the other. There is no such thing as “signing up for a website” or an everlasting connection with a provider. You must go to the website where the DeFi application is located if you wish to utilize it. You may start using the app as soon as you’ve connected your wallet. Furthermore, you have been “identified.” The only difference is that no personally identifiable information is saved. In a matter of seconds, you may move from one application to another.
In the traditional world, companies (like your bank) are run by executives, usually overseen by a board of directors and ultimately owned by shareholders.
The vast majority of companies are privately held, which means that shares are not publicly traded and the average person cannot buy a piece of ownership. Those that are public are relatively expensive when they are publicly traded. By the time a company like Facebook goes public, venture capital funds have already made their profits. They invest in companies when they are very cheap and sell their shares to the public years later at prices reaching billions of dollars.
In contrast, most protocols are owned and governed by their communities. Anyone can submit proposals or code changes to a protocol, which are then accepted and implemented or rejected by the community. To participate in decision-making, users must purchase the governance token. Token holders also typically receive a portion of the fees that the protocol collects for its services.
In this sense, they are a new asset class. Like shares but different because they give the holders ownership of a protocol and not a legal entity. Since the cash flows generated by these protocols are public, anyone can make informed decisions without having to wait for a company to report its profits once a quarter (and without being sure that the reported profits are accurate).
With a transparent mechanism for calculating Protocol Earning (PE), we can apply one of the old metrics for valuing assets in traditional finance: the PE ratio. Simply put, the PE ratio is a way to understand how the market values an asset relative to the amount of revenue it generates. As an example, Compound’s protocol token ($COMP) has a PE ratio of 40. This means that investors are willing to pay $40 for every dollar earned by the protocol today. If you want to know the PE ratio of the most popular DeFi applications, the Token Terminal site does a great job of providing accessible data.