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Huolongguo Finance: introduction to classic blockchain defi applications

Time : 22/05/2022 Author : r76eby Click : + -
        Defi is the English abbreviation of "decentralizedfinance". It is a concept opposite to "centralizedfinance" or cefi. It mainly refers to a blockchain application project built on programmable public blockchain networks such as Ethereum, with the functional goal of financial activities such as cryptocurrency value anchoring, lending, swaps, etc., and composed of a series of smart contracts and applications. Traditional financial activities are carried out with financial institutions as the core, whether payment, lending, securities investment, foreign exchange trading, or futures, options, swaps and other derivatives transactions, are managed and controlled by financial institutions in a central position.
        On the one hand, investors need to fully trust the central financial institutions; On the other hand, financial institutions also need to review and screen compliance matters such as customer identity, source of funds, purpose of funds, etc. Therefore, traditional financial activities are called "centralized finance". The so-called "decentralized finance" emphasizes getting rid of the control, intervention and credit dependence of financial intermediaries, eliminating user censorship and differential treatment, using blockchain technology to fix the content of smart contracts, transaction process records and encrypted asset status, and completely realize financial disintermediation, so that financial participants can directly complete transactions according to the established financial logic of smart contracts. The so-called stable currency refers to the cryptocurrency whose value is anchored to a certain (or a basket) legal tender.
        Strictly speaking, many cryptocurrencies can barely be regarded as "assets" and are difficult to be classified as "currencies". In addition to the lack of legal attributes such as legal compensation and coercion, they also have a very serious defect, that is, the instability of currency value. Like traditional financial activities, defi also needs a general equivalent with stable value to act as a trading medium and value measure, which is the direct reason for the emergence of "stable currency". The business scope of centralized cryptocurrency exchange includes the exchange transaction between cryptocurrency and legal currency. Therefore, it is generally necessary to conduct KYC (knowyourclient) review on users' needs, and the centralized transaction mode of centralized custody, pending order matching and centralized settlement is adopted, so it does not conform to the concept of decentralization.
        There is a kind of application in defi, which specifically solves the exchange problem between different tokens. They make full use of the arbitrage model to establish an automatic exchange asset pool with a pair of token pairs, creating a token exchange mode of "automatic market maker". Compound and AAVE are relatively influential cryptocurrency lending projects on the Ethereum platform. Their business models are very similar. They both set up lending fund pools according to currencies. Liquidity providers deposit tokens into the fund pool in exchange for asset pool shares. Borrowers borrow tokens from the fund pool based on excess guarantee, floating interest rate and compound interest calculation. The system determines the deposit and loan interest rate based on the ratio of token supply and demand, Through clearing arbitrage and collateral auction mechanisms, we can urge repayment and promote the liquidation of non-performing assets, so as to build an automatic lending market for cryptocurrencies.
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