The contract code is stored on the underlying blockchain and can therefore be publicly scrutinized. Smart contracts mitigate both problems and ensure that an application runs as expected. As a result, the user has to trust the application service provider. Either one (or both) could be manipulated. Moreover, the user is not in control of the execution environment. When a user interacts with such an application, they cannot observe the application's internal logic. To understand the novelty of smart contracts, we first must look at regular server-based web applications. When implemented securely, smart contracts are highly transparent and minimize the risk of manipulation and arbitrary intervention. However, their advantage is a high level of security: Smart contracts will always be executed as specified and allow anyone to verify the resulting state changes independently. As a result, smart contracts are somewhat inefficient compared with traditional centralized computing. In the context of public blockchains, the network is designed so that each participant can be involved in and verify the correct execution of any operation. Smart contracts generally refer to small applications stored on a blockchain and executed in parallel by a large set of validators. The backbone of all DeFi protocols and applications is smart contracts. dollar (USD)-pegged assets (so-called stablecoins) on decentralized exchanges, move these assets to an equally decentralized lending platform to earn interest, and subsequently add the interest-bearing instruments to a decentralized liquidity pool or an on-chain investment fund. Thus, this architecture can create an immutable and highly interoperable financial system with unprecedented transparency, equal access rights, and little need for custodians, central clearing houses, or escrow services, as most of these roles can be assumed by "smart contracts."ĭeFi already offers a wide variety of applications. Agreements are enforced by code, transactions are executed in a secure and verifiable way, and legitimate state changes persist on a public blockchain. Instead, it is based on open protocols and decentralized applications (DApps). In particular, DeFi does not rely on intermediaries and centralized institutions. It replicates existing financial services in a more open and transparent way. ![]() The term generally refers to an open, permissionless, and highly interoperable protocol stack built on public smart contract platforms, such as the Ethereum blockchain (see Buterin, 2013). The author thanks two anonymous reviewers for their valuable comments and especially Florian Bitterli, Raphael Knechtli, and Tobias Wagner for their support with data collection and visualization and Emma Littlejohn and Amadeo Brands for proofreading.ĭecentralized finance (DeFi) is a blockchain-based financial infrastructure that has recently gained a lot of traction. As such, DeFi may potentially contribute to a more robust and transparent financial infrastructure.įabian Schär is a professor for distributed ledger technologies and fintech at the University of Basel and the managing director of the Center for Innovative Finance at the Faculty of Business and Economics, University of Basel. I conclude that DeFi still is a niche market with certain risks but that it also has interesting properties in terms of efficiency, transparency, accessibility, and composability. I propose a multi-layered framework to analyze the implicit architecture and the various DeFi building blocks, including token standards, decentralized exchanges, decentralized debt markets, blockchain derivatives, and on-chain asset management protocols. This article highlights opportunities and potential risks of the DeFi ecosystem. DeFi uses smart contracts to create protocols that replicate existing financial services in a more open, interoperable, and transparent way. The term decentralized finance (DeFi) refers to an alternative financial infrastructure built on top of the Ethereum blockchain.
0 Comments
Leave a Reply. |