.jpeg)
Since the Defi fires in 2020, decentralized financing has been hotly discussed, and more decentralized financial products have emerged. Compared to the traditional financial system, Defi has irreplaceable advantages, but it also has some natural limitations that we need to address. This article combines Defi's limitations and proposes a number of remedial steps in the hope that the Defi project can actually benefit people's livelihoods.
1. Define household concepts and practices
The term decentralized finance mentioned above is what we know as Defi, namely a financial ecosystem that does not require centralized institutional permits, based on smart contracts and applications built in distributed networks [1].
The early practice of decentralized finance in my country was the application of the equity financial market, that is, the initial coin offering (ICO) project. ICOs obtain financing by selling blockchain project tokens to investors, but Rongde Target funds are not legal currencies, but mainstream cryptocurrencies such as Bitcoin and Ethereum. ICO is basically blockchain-based equity crowdfunding, but this model has no threshold on the financing entity, and at the same time allows the financing entity to circumvent relevant laws and policies, and resolve similar IPO behavior based on smart contracts [2].
However, after the emergence of this project, due to serious speculation from investors and the lack of appropriate domestic supervision of ICOs, a large number of illegal ICO projects flooded the virtual currency market, which also disturbed the order and stability of the domestic economy. As a result, the state issued Announcement 94 in a timely manner to curb the spread of illegal activity, which also caused a crushing blow to my country's ICO financing model.
Second, the limitations of Defi
Decentralized finance has faster transaction efficiency than traditional finance, and improves transparency and review of transactions through a distributed ledger. Defi's excellence also drives its better use in 2020, and the project could launch more high-quality projects. But apart from its advantages, the development process also has several significant limitations, which will affect the development of the Defi project in the long term.
(1) The types of tokens that perform the function of assets or currencies are restricted
Taking the Defi mortgage loan product as an example, users can only use ETH as collateral when choosing collateral, and mainstream digital currencies such as BTC cannot be used as collateral in the Defi mortgage loan product. This means that it is difficult for digital assets outside of Ethereum to enter the Defi system.
(2) High requirements on oracles for off-chain assets in the chain
Traditional finance can take full advantage of off-chain assets In the Defi system, if off-chain assets are used on the chain, the authenticity and price changes of the off-chain assets need to be synchronized and perceived in a timely manner. Otherwise, the off-chain assets in the chain are not that important to the user. At this point in time, defi oracles appear. If off-chain assets are to be used successfully on the chain, their own dependence on defi oracles is relatively strong. Currently, the development mechanism of the oracle Defi is not mature enough.
(3) Defi does not have a lender of last resort
Traditional financial institutions will generally be taken over by the central bank and insurance protection funds in the event of a risk. In addition, the traditional financial industry itself has relatively comprehensive laws and regulations to protect the legitimate rights and interests of all types of personnel. When risk occurs in the Defi project, it does not have the same role as the central bank's “lender of last resort”. Although Defi relies on an algorithmic mechanism, basically Defi maintains system stability through an incentive mechanism for financial market players [3]. When the risk occurs on the Defi platform, there is no lender of last resort outside the system, and its stability is lower than the traditional financial system.
(4) Limited commercial applications
Defi's main products currently are KPR, loans, etc. And investors should be careful about keeping private keys when trading. When the private key is lost, the digital assets in the account cannot be used. There is no traditional way to retrieve passwords for identity authentication. This has led some investors to choose to avoid risk and switch to other investment products.
In addition, the current application of cross-chain technology in blockchain technology is poor, and the "information island" phenomenon tends to occur, and the operation of reciprocal transactions between various Defi projects is weak.
Finally, to some extent, financial inclusion cannot really be achieved. For example, if a user chooses the Defi mortgage loan product, they must also have a certain amount of collateral, otherwise they will not be able to borrow the appropriate digital currency. It is also a disguised form that allows users to own certain native digital currency assets, even if many users lack genuine funds.
3. Suggestions for developing Defi
Aiming at the typical limitations in the development of the Defi system, Alan alliance consultant suggested improving it from the following aspects.
(1) Increase the type of token that performs the function of an asset or currency
Blockchain engineers and blockchain companies must increase their openness, so that more mainstream tokens can be applied to Defi, and cross-chain projects can be easily traded. And in recent years, my country has accelerated the DCEP research process and continues to pilot it. Under the premise of the appropriate regulatory measures, it is possible to introduce the central bank's digital renminbi into the Defi product as an original asset owned by future users. However, this period may involve the exchange of legal digital currency for other digital currencies. In addition, several project parties have stated that they will launch the Defi unsecured mortgage loan project, which is also a huge advantage for development.
(2) Optimize the oracle Defi mechanism
Because Defi oracles provide a conditional trigger mechanism for off-chain assets in the on-chain asset chain and transaction flow [4], blockchain companies and professional and technical personnel must explore various mechanisms for a decentralized Oracle technology solution. It is also an outlet for the development of blockchain companies. In addition, my country has launched blockchain courses at many universities, which also support the training of blockchain professionals.
(3) Determine the lender of last resort
A number of official digital currencies of the country must be stored in the digital wallet of the Defi project as a "risk reserve" in the event of a crisis in its Defi project. When the "risk reserve" remains in the project party's digital wallet, the project party will take on the role of the lender of last resort for the appropriate product and resolve the risk of the corresponding Defi project.
(4) Applying an innovative regulatory model to the cryptocurrency industry
Because the Defi system is inconsistent with the operating mechanisms of traditional financial systems, many trading platforms and investors use regulatory arbitrage and tax evasion. Domestic regulators can study the sandbox operation model. For example, Hong Kong set up a sandbox to keep an eye on virtual currency trading platforms. After the project has actively placed the Defi project in the sandbox for a certain period of time, it will be more helpful if the project side continues to improve its technology and optimize the project plan. The professionals then write the terms of tax payment and profit distribution into smart contracts based on legal professionals. Perhaps it can promote its healthy operations and also help achieve financial inclusion.
The Defi system has a bigger impact on users. But to make it grow in the longer term, certain improvements need to be made. Looking forward to Defi bringing in better quality projects.