DeFi is a relative concept echoing traditional finance

Traditional finance is built on trust, while DeFi is built on technical code. Throughout the history of human financial development, trust is the core. The lending relationship between people was built on trust at the very beginning. Lending relationship first occurs only between acquaintances, then between indirect acquaintances. Subsequently, professional institutions such as pawnshop come into being, which gradually play a role in the financial business. After the establishment and popularization of modern company system, such lending relationship gradually occurs between enterprises and individuals, enterprises and enterprises, multiple parties to multiple parties and single party to single party.

DeFi is a relative concept echoing traditional finance

However, trust is still the premise of lending, directly or indirectly. With the popularization of electronic technology and information system, data-based analysis and evaluation of the credit of the subject (company or individual) plays an increasingly important role, but this is only an upgrade of trust evaluation system. After the advent of blockchain technology, Defi breaks the conventional wisdom. The lending relationship and process become completely transparent. Smart contract code can recognize the triggering rules of default rules and trigger automatic delivery, thereby achieving “zero human intervention” in financial business. In DeFi mainstream digital currency mortgage business, there is actually no traditional credit and trust relationship, but only consensus and rules, codes and procedures. Their objectivity has replaced trust, the foundation of traditional financial business.

DeFi has replaced credit subject. In fact, traditional financial system still depends on strength, stability, authority and credibility of large financial institutions and regulators. The failure or default of large financial institutions’ credit subjects (large banks / governments, etc.) can lead to the collapse of the entire system. In contrast, DeFi financial system depends on the strength of its protocols, cryptography, and smart contracts. Network scale decides the stability of system, the larger the network is, the more stable the system will be. From this perspective, DeFi is an upgraded version of traditional financial system.

DeFi is fundamentally different in the mode of credit assessment of business participants. In traditional financial system, enterprise size is one of the most common credit evaluation indicators. Hard financial indicators block out a large number of customers with actual financial needs. On the other hand, DeFi allows some relatively weak / small participants to participate equally. Some complex financial services rely on third-party rating agencies, these agencies have their advantages, such as being more professional and more comprehensive in collecting data. However, it is unavoidable that rating agencies themselves are centralized institutions, therefore it is impossible to avoid unfair situations such as “manipulation” and “favoritism.” In DeFi, rating and automatic settlement are expected to be based on completely open and fair data. We are not sure how long this process of universal access will take, but we know that at least the trend is clear.

Theoretically, cross-regional restrictions, peer-to-peer lending and peer-to-peer micropayment which are limited in traditional financial system can be solved in DeFi. Decentralized financial encrypted wallet is actually the equivalent of banknote wallet, autonomous control is entirely in the hands of the owner, the only difference is that one is electronic wallet (controlled by public-private key pair) and the other is physical wallet.

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