How DeFi makes the financial industry leap to the next form

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The old financial system can be described and replaced by a series of programs. Complex financial services are nothing more than a finite state Turing machine, which can be simulated by programs.

Original title: “Old Gods and New Kings: How DeFi Makes the Financial Industry Transition to the Next Form”
Written by: The Muse Museum

Currency comes from people’s consensus on value, and finance is built on this consensus. In the past 2000 years, finance grew out of nothing and developed rapidly in the past 200 years, so that we who are immersed in it naturally believe that a system with banks and various intermediaries as circulation and exchange nodes is the true face of finance.

When DeFi came, finance was presented to people in another form. Wealth is more private and unshakable. Borrowing and trading can be carried out all the time and nowhere. When you think that Marx said “an old and backward production relationship hinders the development of productive forces, it must be a new and advanced production relationship. When “replacement” is more written, then you and me in this era will have the honor to witness the dawn of a new era.

The origin of the old age

The “American Gods” tells us that the gods were born out of mortal thoughts. When the earliest currency in the modern sense was created by the ancestors of Asia Minor in 600 BC, no one would realize that after 2600 years, the god of finance would affect all aspects of our society and life in this way.

The appearance of gods depends on people’s beliefs and guides people’s real life. However, people’s consensus is not static. Just as the Roman god system in the West replaced the Greek god system, the Haotian Jade Emperor God in the East replaced the original Eastern Emperor Taiyi. The earliest Jiaozi appeared in the 13th century also evolved into the current exchange system.

It cannot be denied that the modern financial system of exchange and deposit has greatly promoted the circulation of global value when replacing the old financial system of bartering and bartering.

Since entering the 21st century, digitization has penetrated into the inner layer of every capillary in society. The 20th century’s financial god’s newly built cornerstones of the temple (credit cards in 1950, ATM in 1967, telephone banking in 1983 and internet banking in 1994) are still fulfilling people’s faith in him as they did in the first place? Fairer, more timely, and more efficient.

Obviously, although the current financial system uses various technologies to try to make itself more fashionable and effective, in essence, we still need bank access to enjoy financial services, pay high costs for exchange, and rely on information Wrongly called a high-level broker of food.

In the past 150 years, our financial ecological structure has not been fundamentally different from the Victorian era, and it has stagnated in the industrial era.

The decline of the old gods

Let’s take a look at the current financial system, which is lagging behind the digital wave:

Monopoly

In the financial system, there seem to be many banks and brokerage firms. However, from the perspective of service content and product attributes, there is no obvious difference between banks and banks. These trusts control the interest rates and fees of borrowers. There is no competitive difference in the market, allowing borrowers and depositors to meet their actual needs. Decide on borrowing and deposit prices.

The oracles of the old gods are the lifeblood of the financial economy. Don’t give permission lightly to ordinary people, otherwise it will affect social stability. The monks in the dark ages of the Middle Ages monopolized the “knowledge and education” under the name of “the power of gods”. Spend a lot of money and enjoy luxury, while farmers are frugal and must compare.

Do you really think that the high-rise buildings, the well-dressed, and the coveted contacts are the result of these elites’ understanding of finance? No, they rely on the ignorance and powerlessness of every lower-level citizen on finance.

For example, a certain large bank that a certain domestic investor builds a position on a large scale is competitive with those extremely cheap demand deposits that are deposited in a personal savings account and have no income. Do savers know that they have suffered a huge loss?

Mandatory service threshold

Nothing is more impressive than the artificial setting of service thresholds.

All borrowing and lending must have corresponding bank accounts, even if you already have many accounts. To trade securities on the exchange, you must also open an account with the corresponding broker. It is said to protect the safety of investors who do not have the ability to invest.

Financiers ignore that there are still 1.7 billion people in the world who do not have any accounts. Because of their backward information, the poor cannot have access to financial services. Or when the user’s volume is small and the demand is not large, customers can only provide them with high-cost lending or transaction services in the name of poor qualifications.

When people demand equal treatment in access to services, risk control is the best reason in the financial system. But is there really no way to provide equal financial services for everyone?

Inefficient

“In the past, the carriage was very slow, the letters were far away, and I could only love one person in my life.” Thanks to the Internet revolution, SWIFT allows funds to flow all over the world. Exchanges in various countries are working diligently to provide traders with 5 -8 hours of transaction service, which was unimaginable 100 years ago, financiers are naturally proud of their efficiency and response.

However, for remittances from Europe to South America, there is no time for at least two days or more, and the money will not go to the ground. The handling fee is as high as 5-7%. If it is a small remittance, it is estimated that the money is not enough to pay the handling fee.

And the day stock trading that people are accustomed to, can’t be traded outside of working hours? Is the market closed on weekends and holidays because of safety or because of the need for exchange personnel to rest? Can value discovery only be done in the working day?

Lack of collaboration

In medieval Europe, feudal lords levied high and volatile taxes through various means. Merchants had to pay taxes on both ends of a bridge, just because the two ends of the bridge belonged to two different lords.

Our financial system is now undoubtedly similar to the era of feudal separatism. The masses will face high costs when they transfer their assets from one institution (country) to another institution (country). Each institution treats the client’s assets as its own. The assets and customer data are considered to be the private wealth of the organization.

In the territory of financial institution A, the wealth created by customers through their own labor cannot be licensed by financial institution B, and therefore cannot be used in territory B, even if A and B are in the same country, in the next block Adjacent to each other.

opaque

The existing financial system is very opaque to ordinary users. Users seldom know the status of their banks. The data of the transaction targets has also been deliberately manipulated and abused by major trading institutions.

The former was manifested in an uproar in the world when certain banks declared bankruptcy after being taken over due to radical development; the latter was manifested in the short positions of GME stocks exceeding 150% of the total circulation, detonating the vigorous WSB leading retail investors to short-sell. Uprising movement.

Financiers often use risk level stratification and maintain financial order to explain the strategy of delivering different information to different customer groups. It seems that the power of finance naturally has a Matthew effect.

However, this inequality and opaque nature is only a product of the old order of finance, and the power that finance itself gives everyone is the same, just like knowledge.

The rise of the new god

The magnificent Wagner opera “Song of Nibelungen” tells the myth of the ancient Nibelungen. Mortals themselves can obtain introspection and redemption like the hero Siegfried, and finally ignite the Walhalla Temple, which represents the gods. Gods cannot exist without humanity. They are not omnipotent and invincible, and they themselves will face the destiny of destruction.

In the torrent of the Internet, financiers of the old order are gradually improving their defects to adapt to the historical process of the new digital wave. For example, the current Fintech technology is trying to use the power of technology to reduce its own operating costs and improve its work efficiency.

Yes, their starting point is not to help customers maximize their benefits, but to maximize their own profits. “Do you think we will spend a huge amount of money to invest in an electronic system to greatly reduce our profit sources and destroy our own lives?”-Anyone who asks such a question will be scorned by financiers.

It has already been written in “Das Kapital”:

The transformation of production relations does not depend on its own improvement, but comes from the advancement of productivity.

A new thing called DeFi appeared on the horizon.

The full name of DeFi is Decentralized Finance, which is an open source financial protocol for decentralized custody and financial products that do not require access.

It puts financial services and financial products on the blockchain, and non-tamperable programs (smart contracts) rather than physical organizations or institutions serve all financial needs. Benefiting from the cost and marginal benefits brought by the scale of the Internet, there is no difference between 100 yuan and 100 million yuan in financial services for fully automated procedures, thus providing users with the lowest cost and the greatest value.

DeFi believers believe that the old financial system can be described and replaced by a series of procedures. In fact, it is true. The seemingly complex financial services are nothing more than a finite state Turing machine, which can be simulated by programs.

On this logical basis, users no longer face institutions or organizations, and the cost reduction and value enhancement effects increase exponentially with the spread of networking. DeFi’s various customizable and combinable products are automated without manual participation throughout the day, which will siphon the traditional financial ecological market, and the dawn of a new era has appeared.

Code as a service

In the world of DeFi, all of the user’s property is in a private digital wallet that is completely controllable by himself, not owned by any institution, and property ownership is protected to the greatest extent.

The financial functions provided by DeFi, such as lending, trading, and insurance, are an open source code platform for everyone, providing rules for using assets without touching the user’s property itself. Users and the market can freely choose the price and quantity they want based on the real-time supply and demand data. The tools to maximize revenue will find the assets that can help users obtain the highest revenue from the entire network. All of these are deployed on network nodes. Different codes for various functions.

Within reach

The account that DeFi provides the basic functions is the wallet address, and the wallet address is initiated by the user on the network. The real-time distribution of the network is protected by mathematical algorithms and only corresponds to the user’s personal unique code. Users do not need to go to a financial institution to apply, and do not need any identity or asset amount access to have a wallet.

As long as they are connected to the Internet, users with wallets can get the financial services they want. In this Internet era, this means truly giving individuals the freedom to access finance.

Reach the world, never sleep

Compared with the current lengthy and complicated exchange mechanism between the mechanisms of different countries (institutions), DeFi relies on the cross-regional consensus mechanism at the bottom of the blockchain, which can complete the clearing, remittance and delivery of funds within a few minutes, and the transaction cost Extremely cheap. Benefiting from the 7X24-hour value network’s constant global exchange of price information, users can trade private assets anytime and anywhere without having to wait for any institution or trading center to rest.

Currency Lego

There is another DeFi called Lego currency. Because of the open source financial protocol, it is possible to combine financial services arbitrarily.

Anyone can combine these different modules to form a new DeFi product in the original ecology. The modules are matched with each other to generate financial service products that meet actual needs in real time according to the needs of users.

Surrounding these Lego centers is the customer’s private property-wallet address. In other words, the customer’s private property can be bought, held, and sold freely on any financial products needed, A product and B Under the authorization of the customer, the product jointly accepts and processes the unique data of the entire network-the user’s private property.

Highly transparent and open

DeFi’s system is open. On the one hand, its basic smart contract code is open source for people to query and supervise. On the other hand, in DeFi-based transactions, in addition to the encryption of the private information of the parties to the transaction, the transaction data is open to everyone. Anyone can query blockchain data and develop related applications through the open interface, and in its system All transaction records and transaction behaviors generated are also traceable. Therefore, the entire DeFi system is highly transparent and open.

The future of the world

The second law of thermodynamics, also called the law of entropy increase, says that the entropy of a closed system is always increasing. In other words, the ineffective energy in the universe has been increasing. If the external effective energy is not increased, the energy will not be able to do work, and eventually the system will die of entropy. This is the case for everything in the world.

If an enterprise cannot continue to innovate and progress, it will soon be eliminated. If a system is always closed to self-interest, instead of increasing the total benefits of society, it will eventually die.

The ills of the old finances have existed for too long, leading the believers of the old gods to believe that the world has been centered on the earth since the creation of the world. Therefore, when Copernicus introduced the heliocentric theory, the old belief system had a great rift. When Darwin When the theory of evolution was written, God could no longer create humans.

Why can’t people find the direction with the least cost of financial friction, and why should they accept the asymmetric rights and obligations of the old world? If you have not seen the mighty power of the new god before, then when the new god said: “Let there be light, then there will be light”, the world will have dawn and the door of the new world will be opened.

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