DeFi Analysis: Present and Future

The DeFi are grabbing the headlines in recent days, both for their strong rise in the sector, as well as the collapse in recent hours. Today we’re going to hear the opinion of expert Andrés Salamone, founder of Córdoba Bitcoin.

Decentralized finance has undoubtedly come to stay within the crypto ecosystem. Something similar to what happened with the ICOs and their boom in 2017 is happening this 2020 with the DeFi, and entering a second phase with yield farming, which itself is an alternative market to cryptomonies.

DeFi will be discussed at the Binance Summit

The DeFi in context
The DeFi do not have the basic principles of decentralization and are not subject to censorship as Bitcoin is, since it depends on whether or not financial support, or what is established as a guarantee in the form of „collateral“ from the companies or DAOs that create it. They are a financial derivative of the crypto-currencies to define it.

The DeFi create a 1 to 1 convertibility pattern of a token to a trust currency (USD), through an intelligent contract that controls its stability when its collateral (token of the network) or cryptomone currency increases or decreases its price. Thus leaving an average interest in favor of the DeFi or stablecoin holder.

The most used blockchain network, since it started with MakerDao was with Ethereum ETH. Currently the fees or commissions of Ether gas are exceeding US$ 15 per transaction.

This is due to the consensus protocol used in Ethereum based on PoW, using physical mining to do simultaneously 3 verifications for each DeFi transaction (the confirmation of the intelligent contract that must buy or sell gas, the sending or receipt of the gas and the sending or receipt of the DeFi token). All of this automatically, and in thousands of daily transactions, causes congestion of the ETH network and the wait for confirmations to be delayed, increasing the price of the commission that each miner earns to give priority.

This turns PoW networks into a tractor to run a formula 1 race. This task is made much more efficient with PoS and similar networks that do not require physical mining. It is a problem that ETH is trying to solve with the upgrade to ETH 2, in other words it is a victim of its own success.

Challenges of Decentralized Finance

The great challenges of this emerging financial industry, and proposals of solutions from new uses of networks and improvements in blockchain consensus protocols are emerging at an accelerated pace and even more with yield farming robots such as (Compound, Balancer, Curve, Synthetix or Ren) that seek different strategies to obtain more profit, from the different rewards or interests that each DeFi obtains.

In this way a secondary market is created where decisions are very important. That is why the votes of the DAO (decentralized autonomous organization) that each DeFi is managed are very relevant. An outstanding case of Bitcoin Revolution, where 30,000 tokens were issued (with no initial value officially from its white paper), but up to 36,000 USD were traded on the secondary market, almost 3 BTC.

Yiel Farming’s harvest is putting the technological risks of PoW-based Blockchain networks to the limit, but driving their adaptation to speed improvements and commission costs as in the case of looping an Ethereum sidechain (it’s like Bitcoin’s LN). In addition, the high risk of scam, as many shitcoin projects are injected into the market without any verification, leaving investors on the road with false promises of returns.