Blockchain and DeFi are in their infancy and have a long way to go
It looks like another perfect storm is forming on the horizon. This time it will be the next-generation Internet ecosystem based on Blockchain technology, first introduced by the Bitcoin system development team 12 years ago. There is no doubt that in theory this is a promising innovation.
The problem is, blockchain is touted as a panacea for all internet ills such as data security, privacy, network vulnerability and hacking, and ransomware. It’s too early to predict your own long-term well-being.
The danger lies in the widespread adoption of this unproven innovation – with the exception of limited movements of cryptocurrencies – in the world of financial systems without proving its effectiveness in the global financial network which is the backbone of the current economic order.
This time, it may be a combined hurricane and tsunami, as internet innovation in blockchain technology facilitates Ponzi-like schemes in the name of cryptocurrencies and decentralized financing.
Cryptocurrencies can be a new form of legitimate asset, or a neatly organized deck of cards waiting for a domino effect for their downfall. We must wait and see.
Read: As Bitcoin Loses Speed, Blockchain Moves To The Next Generation (September 10, 2021)
For the uninitiated, Blockchain is an innovative technology that can democratize the centralized and authoritarian world of financial systems. In theory, it can bring transformational changes to financial transactions by creating more fair and egalitarian market systems. Operating autonomously without central control, it can reduce the cost of all financial transactions. In other words, it may sound like a dream come true.
What is blockchain?
Blockchain is a software enhancement of the current Internet infrastructure. Blockchain protocols impose a few additional features on the current internet establishment.
It is primarily a system of decentralized peer-to-peer network architectures that communicate with each other. There is no central computer, as in the case of client-server cloud computing.
All node computers are connected to a network and all have the same privilege as the same software that runs them.
Data transmission is enabled over TCP / IP as usual, but the data is cryptographically scripted for data privacy.
The data is stored in a chained ledger with a creation time timestamp. Data chaining is used by mathematical algorithms called cryptography to maintain confidentiality and secure the identity of the parties involved. This concept is called hashing.
The recorded data is immutable, which means that it cannot be updated, modified or deleted from the chain.
User identity is managed by PKI, which stands for public key infrastructure technique, a tedious process that guarantees the authority and authenticity of the system user.
The most important feature of this network system is that it works autonomously on the basis of software consensus algorithms and does not require any manual intervention at any time.
In addition, all network and computer operating costs are paid by individual transactions upon completion.
What are cryptocurrencies?
Cryptocurrencies or digital currencies are virtual currencies generated by a system based on Blockchain technology.
They are privately promoted digital currencies without government authorization or control. Their value is very volatile and can fluctuate depending on their supply and demand. Bitcoin is the first cryptocurrency. Today, there are tens of thousands of cryptocurrencies valued at over $ 2,000 billion on the market.
Read: Lure of Bitcoins: greed blinds even the wisest to risk (February 24, 2021)
What is DeFi?
DeFi is a buzzword for decentralized finance. It is an approach to develop a network of systems to independently operate financial transactions that are distributed worldwide without central control.
The DeFi community is organized in the form of Wallets, Exchanges, Data Miners. The wallet is where an individual user’s assets are recorded and stored. An exchange is the system where an individual can exchange fiat currency for crypto assets and vice versa. A Data Miner is the computer installation where data is recorded and distributed cryptographically in chained record blocks. All these three entities are connected by a secure peer-to-peer network.
Financial applications can be developed using Blockchain technology to enable all existing financial and asset-based transactions independent of central control.
Such applications are developed using a concept called Smart Contract.
Smart Contract is a software module, similar to Internet AAP, called Dapp String Codes, developed in one of the appropriate programming languages ââto execute full terms, binding conditions and actions in order to complete a transaction initiated by the ‘user.
There are several cryptocurrency platforms developed using Blockchain for DeFi applications. The very first was Bitcoin, followed by Ethereum.
Some of the other DeFi platforms are Avalanche, Hyperledger, Polkodot, Solano, and Cardano. Popular crypto exchanges are Coinbase, Coinbureau, and Binance.
ICO, or Initial Coin Offering, is the process by which cryptocurrencies originate. Its counterpart in the DeFi ecosystem includes Altcoins and digital tokens.
Altcoin Tether stands for Stable Coin, which is proclaimed as a supported dollar reserve. A stable coin is equivalent to one US dollar in the crypto world. However, there is no accountability, transparency, traceability or oversight under GAAP on such claims.
Recently, US government regulators demanded that basic identity be captured by exchanges for trading in cryptocurrencies. This regulation is called KYI, or âknow your customerâ, AML – âanti-money launderingâ.
There are many flaws in this DeFi ecosystem. Noteworthy is a story published in the media about the Tether-Stable coin issued by Tether Holdings, an offshore company. The company has issued more than $ 66 billion in Tether to date. Company officials are unable to positively demonstrate its reservations to US authorities in New York. The crypto community is worried that if investors run for their money, the system could collapse and investors will be left behind.
A recent IMF research paper criticized the sale of these assets under the shadow of cryptocurrencies to unsuspecting investors out of thin air.
It can be pointed out that there are many crypto experts and gurus who regularly promote cryptocurrencies, including the one in question, Tether, through YouTube and similar media platforms.
Read: 10 Reasons Why The Cryptocurrency Bubble Is Shattering (May 24, 2021)
Investors should be aware of the danger inherent in this innovation. It is a potential bubble that can not only devastate crypto investors, but also affect the normal financial system around the world. The liquidity of cryptocurrencies directly or indirectly concerns some of the major international banks.
To conclude, if the bubble bursts, it is again technology, a devil embodied in the form of the DeFi protocol. Blockchain and DeFi are in their infancy and have a long way to go.
(The author is neither an opponent nor a supporter of DeFi ecosystems. He is passionate about technology and curious about the effectiveness of such transformational changes. The opinions expressed here are based on his own reading and on articles and documents. publicly available research.)