[DeFi Popular Science] What basic technical capabilities do DeFi products need?

Original title: "[DeFi Popular Science] What basic technical capabilities do DeFi products need? "
Written by: PlatON

The biggest difference between DeFi and traditional finance is that the financial infrastructure supporting the business is completely different. In reality, we have a complete set of credit risk assessment methods to measure the business, but in DeFi, the blockchain is a trustless environment, the address is essentially anonymous, and there is no necessary connection between the identity and reputation mechanism outside the blockchain. The credit risk assessment methods of mainstream finance are invalid, and the subsequent introduction of distributed identities is needed to achieve real risk control.

Therefore, the development of DeFi is highly "dependent" on blockchain technology. DeFi uses blockchain technology and tokenized assets to achieve equal, efficient, highly transparent and highly reliable financial services. Thanks to the application of smart contracts, DeFi contracts are automatically executed, so they are highly equal and reliable. However, at the same time, the execution efficiency and delay of the system will expand the risk exposure and even lead to stampede events such as chain automatic liquidation. The system performance is improved, and the introduction of consensus-based risk control mechanisms is urgent.

The exponential growth of DeFi in recent months is staggering. In comparison, the development of blockchain technology is unlikely to grow exponentially. It is precisely because of the use of blockchain technology that DeFi risk events occur frequently. Due to the great constraints of the underlying platform technology, blockchain technology does not seem to be mature enough at present.

In the exploration of finance into application fields, DeFi is also constrained by the performance and security of the underlying infrastructure, and the basic technical capabilities still need to be consolidated. The "dual realization" of performance and security is also an issue that blockchain technology cannot avoid.

For this reason, the primary consideration for DeFi products should be basic technical capabilities, which is similar to considering liquidity and risk control first in traditional finance.

So what basic technical capabilities do DeFi products need to have?

The first is the technical capability of asset issuance (such as the ERC-20 method) and the technical capability of cross-chain asset import (such as the notary mechanism, side chain/relay mechanism, hash locking, support for WalletConnect protocol, etc., and actively introduce MPC application scenarios). Currently, Ethereum accounts for about 95% of DeFi because it has the technical capability of ERC-20 asset issuance, far ahead of the rest.

Secondly, there is the lending, asset management, brokerage, exchange, and insurance service ecosystem based on smart contracts . The essence of the DeFi protocol is a combination of debt contracts, equity contracts, and other derivative contracts, and the rationality and economic effects of the design protocol.

The second is the ecological entrance that users are most familiar with , which is the APP or website we often use. The construction of the entrance is extremely important, because users cannot perceive the "good or bad" of technology and can only judge it from the visual products.

Finally, there is the construction of ORACLE oracle and the access of external ORACLE oracle. Oracle is the interface for blockchain smart contracts to interact with the outside world. It can find and verify real-world data and submit information to smart contracts in an encrypted manner, so oracle is crucial for DeFi.

As technical strength increases, we can divide the evolution of DeFi into three stages:

In the first phase, basic module services are provided, including: issuance, including asset creation, cross-chain asset import, liquidity mining, etc. (such as LAT, ETH, BTC, USDT import asset management); lending and pledge payment (basic commercial bank services); support for basic DeFi protocol standards, and ecology.

The second phase is to provide financial services, such as asset management (various tool groups, including wallets, etc.), trading (liquidity promotion, credit trading and other brokerage services, etc.), fixed income and derivative trading.

The third stage is to improve the ecosystem, including: DeFi insurance as a risk hedge, widespread application of reliable and trustworthy information data aggregation services (the basis of ORACLE), and credit management services based on distributed digital identities.

Although DeFi is in its early stages, its rapid development speed makes it one of the few applications that have "stepped out" of the cryptocurrency circle. With the replacement of products in the DeFi industry, I believe that companies with absolute advantages in technical foundation capabilities will stand out and compete in the market.