What are the experiences worth learning from DeFi, which is known as "will subvert existing finance"? (below)

Editor's Note: The emergence of smart contracts has provided an important necessary condition for the development of the blockchain, and since then the blockchain world has had a wealth of applications. DeFi is an important part of blockchain applications that cannot be ignored. Many large institutions and outstanding investors have never stopped discussing DeFi. ING Bank has been analyzing and researching the risks and opportunities faced by DeFi, hoping to optimize its system application and provide application models. Not long ago, ING Bank wrote a book entitled "Lessons Learned from Decentralized Finance", and proposed that "if traditional finance and decentralized financial services can be combined, better financial service methods will be produced. "The key conclusion. In this in-depth report, the mysteries behind the current DeFi are dismantled in a relatively clear and simple way, and the definition, attributes, classic use cases and experiences that can be obtained from DeFi are shared. In the previous two articles "4D Report 丨 What is DeFi, which is called "will subvert existing finance", and what advantages does it have? (Part 1) "Wanzi Report 丨 What are the typical cases of DeFi, which is called "will subvert existing finance"? (Middle)" we introduced the composition and important characteristics of the current DeFi in detail, summarized the ten attributes of DeFi and the classic application cases of DeFi, and in this article, we will discuss in depth what we can learn from the current development of DeFi The experience and lessons learned in the situation, in order to explore how to better make DeFi play a role in the financial industry. The following is the compiled content-zce of the Chain Market team for your understanding and study, and I hope it can inspire you. Because the paper is long, we will push it in three times, please enjoy the following: Lessons learned from DeFi Cardano founder: I don’t want to be called the co-founder of Ethereum anymore, Cardano makes me more proud: Cardano founder, Ethereum co-founder Founder Charles Hoskinson tweeted: "One day, the cryptocurrency media will no longer call me the co-founder of Ethereum, but will only mention Cardano, and that will be a very good day. Throughout my life, There is no single project or endeavor that I am more proud of than Cardano.” (ZyCrypto) [2020/4/25] In this section, we will present what we learned from Sections 3 and 4 about traditional finance and decentralization. lessons from the globalization of financial services. 1. Composability is the catalyst for DeFi innovation As mentioned in Section 3, composability allows DeFi developers to easily connect and use existing components on the blockchain to create new financial services. Composability affects the open source of DeFi financial services. Organizations may consider opening up their service so that any other party can re-use or build on it. However, some services may not be opened as this would result in a loss of competitive advantage, and some services may not be opened due to current legislation. In addition, we can also draw parallels from the 2008 global financial crisis. Debts and obligations can become intertwined when new financial services are built on top of existing ones. Gudegeon and others believe that the composability of DeFi makes the ecosystem face "financial crisis contagion". Financial contagion in DeFi can be described as the potential damage to all protocols that depend on the underlying protocol if the underlying protocol fails to function as intended by the protocols built on top of it. Voice | Professor of Kyoto University: Bitcoin at this stage should not be called a virtual currency due to large price fluctuations: According to Crypto.Watch, the Japan Financial Services Agency recently disclosed the "41st Financial Review Conference" held last month. "Related conference materials. Naoyuki Iwashita, a professor at Kyoto University, said at the meeting: When the price of Bitcoin is relatively stable, it can be used for international transactions, including money laundering and other illegal transactions. However, it cannot be used as a currency when the price of Bitcoin fluctuates greatly. I don't think Bitcoin at this stage should be called a virtual currency. On the other hand, there may be currencies that are more suitable to be called virtual currencies in the future. In this case, whether there will be a new cross-border system and how to deal with it also needs to be studied. [2019/4/8] Therefore, it is best to be cautious about composability in DeFi, because its properties have the potential to undo all innovation in DeFi, just as it accelerates innovation. Organizations should consider the extent to which they want to open up their existing financial services and interweave with new ones. 2. DeFi is very flexible Compared with what customers of traditional financial institutions can do now, DeFi transactions can be sent globally at any time 7*24 hours and in a shorter time. Financial intermediaries eliminate the complexity of cross-border transactions at the expense of efficiency, while DeFi creates opportunities to improve efficiency while increasing complexity. We can analyze this utility trade-off more deeply to find a balance point, that is, the extent to which bank customers will tolerate a higher level of complexity if it can improve the efficiency of financial transactions. We have reason to believe that using a hybrid of traditional finance and DeFi could be the future winner, reducing the time and cost of cross-border transactions while properly monitoring who is receiving transactions. Commodity Futures Trading Commission Chairman Becomes Twitter Celebrity Dubbed "Crypto Daddy" (Cryptodad) After the currency suggestion, it gained the support of tens of thousands of fans almost overnight. The bespectacled 58-year-old regulator official now has 49,000 Twitter followers and is often dubbed "Bitcoin Jesus" and "one of the Bitcoin community." He even admits to the somewhat outlandish label bitcoin investors have given him: "cryptodad." [2018/3/31] 3. DeFi legislation may improve the adoption of DeFi If regulators announce legislation favorable to DeFi, a wider range of financial institutions may adopt DeFi. However, there is still a long way to go when it comes to DeFi regulation. We believe that an obvious question holding back DeFi adoption at the moment is who is to blame if DeFi protocols do not function as intended. 4. Traditional financial institutions can benefit from the borderless nature of DeFi For traditional financial institutions, the cost of complying with multiple regulations in different jurisdictions is high. Plus, DeFi covers multiple geographic regions thanks to the underlying distributed ledger technology. In principle, anyone with an Internet connection can obtain DeFi financial services anywhere in the world, even outside the earth. Traditional financial services can consider cooperating with decentralized financial services to establish partnerships and combine the expertise of the two. While DeFi currently seems to be a separate field, traditional finance and decentralized finance have unique features that work in each other's favor, and we envision the two converging at some stage. However, the challenge for traditional financial institutions is to ensure that their assets remain within the whitelisted countries. Bitcoin Called a 'Gateway Drug': What used to be enthusiasm has turned into a mania, as Nick Colas, Wall Street's first bitcoin analyst, calls bitcoin a "gateway drug." [2017/12/21] 5. DeFi is a coin with two sides. At present, the innovation of DeFi is mainly based on microscopic effects, but not based on macroscopic effects. Current DeFi innovations, such as issuing stablecoins, or providing peer-to-peer lending platforms, (as described in Section 2), and the use cases in this white paper (as discussed in Section 4), aim to improve existing, traditional financial services, or propose new types of financial services. This is what we think of as the microscopic effect of DeFi. However, before the introduction of blockchain in 2009, the macro-effects of decentralization in financial services had been discussed. Discussion of these effects in the literature is currently lacking. For example, decentralization can be "dangerous", "insidious", and "may require rethinking". While DeFi appears to offer many opportunities by improving existing or introducing new financial services, its macro effects should also be considered. We consider the discussion of the macro impact of DeFi to be future work. 6. The characteristics of DeFi are not always realized in practice. The characteristics of DeFi include efficiency, transparency, decentralization and finality. These characteristics are beneficial in theory, but in practice, the benefits of these characteristics are not Not always possible. For example, in some encrypted assets, transaction costs are higher than those in traditional financial payment systems. As another example, (Bitcoin and Ethereum are less decentralized than envisioned. While DeFi sounds great in theory, there appear to be multiple hurdles to overcome before current companies can use DeFi. Although It can be said that the improvement of existing traditional financial services can be achieved without DeFi, but we believe that exploring the possibility of combining DeFi with existing traditional financial services can also be a solution.Former Federal Reserve Chairman Greenspan : "Bitcoin is the money that used to be called fiat": Alan Greenspan, who was chairman of the Federal Reserve from 1987 to 2006, explained on his radio show: "Bitcoin is the money that used to be called fiat" Greenspan believes that because Bitcoin is not backed by traditional commodities, he believes that decentralized currencies are very much like non-cheque bills issued in the past. [2017/11/16] 7. At present, there is no clear definition of DeFi. As discussed in Section 1, DeFi is a paradigm, concept and application of financial services using blockchain. Also in Section 2, we discussed how DeFi can be integrated with public blockchains (public chains) and permissioned blockchains (consortium chain, private chain). Therefore, in order to have a reasonable debate on DeFi, any company should first define DeFi. Before discussing its applications, benefits and challenges, in this white paper, we recommend DeFi is defined as any financial service on the blockchain. 8. The DeFi literature requires a critical perspective. Most of the academic literature we searched outlined the benefits of DeFi, but it may be difficult for an organization to leverage emerging technologies such as blockchain. However, a critical view of these papers suggests that, as we discuss in Section 3, there may also be challenges for DeFi. 9. Currently, There is a contradiction between transaction transparency and basic human rights. DeFi provides transparency in financial transactions at the cost of privacy. DeFi's transparency may violate basic human rights, which is discussed in Section 3. Transparency attributes. Since DeFi may To improve the traditional financial services currently being provided, large companies should seek to cooperate with companies that build DeFi, rather than reinvent DeFi. Similarly, DeFi companies can learn and adopt the knowledge, experience and procedures that large companies already have, such as reverse XI money and KYC. 10. DeFi is not without risk Some DeFi literature seems to be biased towards the advantages that DeFi has. The examples provided in the literature are only one side of the coin and may only be applicable to a single type of use case. However, when large sums of money are used There are several risks that participants expect to be mitigated when conducting transactions. Some of these risks appear to be simply ignored by some of the current literature on DeFi. This is where DeFi can learn from the vast experience of traditional financial institutions. In our view Now, it would be naive to think that a technology can replace an institution. For example, given the current state of smart contracts, Smart contracts can never replace third parties, such as lawyers, because the spirit of the law cannot be reflected in code alone. 11. At present, there are no responsible parties in DeFi. Those who support decentralization may say that having almost no responsible parties in DeFi is its advantage, not a disadvantage. However, we believe that adding accountability in DeFi can increase the credibility of DeFi. The decentralized nature of DeFi shifts end-user trust in the quality of the platform from intermediaries to those who write the smart contracts that DeFi protocols run on. Plus, DeFi founders have a tendency to publish agreements anonymously, though sometimes millions of dollars can be poured into a single smart contract in a matter of minutes. 12. Complete (de)centralization may be suboptimal Satoshi Nakamoto believes that a system with financial institutions as trusted third parties will be affected by the inherent weaknesses of the trust-based model. However, Brown and Oates argue that in their particular use case, a fully decentralized system would be suboptimal and would likely require the involvement of a central authority. A disadvantage of decentralization, for example, is that it can lead to inequality, adversely affect equitable distribution, can jeopardize stability, and can harm efficiency. Although some research is already underway, the extent to which a fully decentralized financial system is optimal is a topic for future research. For example, Darcy et al. believe that blockchain technology can promote and reduce the cost of institutional evolution. A fully traditional or fully decentralized system has inherent weaknesses. According to this white paper, we envision that the payment system of the future will be a system that combines traditional finance and decentralized finance to best meet the needs of its customers. 13. Linking real-world assets to DeFi remains a challenge Most innovations in DeFi are now about improving financial services. Such services include digital tokens and mostly exclude real-world physical assets. Please note that we differentiate between digital tokens and digital assets in the white paper. These digital tokens only exist in digital form and have no counterpart in the real physical world. An example of a digital token is a cryptocurrency (such as Bitcoin). In contrast, digital assets do have counterparts in the real physical world. For example, we can construct a token to mark a house, and this particular token is the digital representation of its physical equivalent. The slow development of asset tokenization may further accelerate the liquidity of DeFi. However, the main challenge is to ensure that there is a link between the digital token and its physical equivalent. Currently, it appears that a central body (such as a notary) is needed to ensure and guarantee the existence of such a link. This shows that there is a need to combine the benefits of DeFi with a centralized party.

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