DeFi, short for Decentralized Finance, which is also known as Distributed Finance or Open Finance in China, is a financial business environment without any central endorsement body. Investors can clearly see the fund status and track the status. Moreover, DeFi cannot be tampered with due to technical consensus.
We also see some new technical and business features that DeFi brings to the table.
First, the funds of lending and business transaction are placed on a verified smart contract (or address), which effectively implements transparent supervision of the fund pool. Similarly, fund flow records are distributed on a unified, geographically dispersed ledger that can be universally accessed. This is effective in guarding against technical, financial and geographic risk.
Second, DeFi doesn’t need to conduct background checks and due diligence on borrowers / financiers, which is time-consuming and costly in traditional financial industry. Similarly, there is no need for fund provider to know the specific information of counterparties. The pledge of digital assets / Token can automatically trigger settlement and guarantee lending rights.
Third, DeFi runs automatically in contract code through algorithms, adopts artificial intelligence methods to process core financial logic, and collects market data to form high liquidity capital markets and financial service markets. Therefore, DeFi system can create a more transparent and credible, more fair and equitable credit market. Financial interest rate is no longer determined unilaterally by central bank or authoritative financial institutions, but by algorithms, which truly reflects market supply and demand. These algorithms can implement basic financial logic. For example, if fund supply decreases, interest rate will rise to raise loan costs and if fund supply increases, interest rate will drop to make loan cheaper. In traditional finance, there is a huge gap between regions in fund supply and demand. Fund is getting cheaper in developed countries while becomes more expensive in developing countries. With increasing loan demand in developing countries, the price gap will increase.
Besides, the collateral of DeFi is more than cryptocurrency, but all valuable assets. In theory, any valuable asset could be posted to a smart contract and be used as collateral to obtain financing. When an overdue default occurs, the smart contract will automatically transfer ownership.
It’s true that the realization of all these DeFi concepts still have long ways to go. For an example, before we can collateral to obtain finance, a process is needed to be available for the asset to be link to ownership. At present, some DeFi concepts have achieved a proof of concept, we will introduce them later.
