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Defi【GM】

What is Financial Service

Financial Service, as a broader term, can be summarized into three main activities: transferring money, borrowing & lending, investment & insurance. Traditionally, this is achieved through centralized entities such as banks. There are many downsides and limit to this.
DeFi v.s. Tranditional Finance
DeFi
Traditional finance
1
You hold your money.
Your money is held by companies.
2
You control where your money goes and how it's spent.
You have to trust companies not to mismanage your money, like lend to risky borrowers.
3
Transfers of funds happen in minutes.
Payments can take days due to manual processes.
4
Transaction activity is pseudonymous.
Financial activity is tightly coupled with your identity.
5
DeFi is open to anyone.
You must apply to use financial services.
6
The markets are always open.
Markets close because employees need breaks.
7
It's built on transparency – anyone can look at a product's data and inspect how the system works.
Financial institutions are closed books: you can't ask to see their loan history, a record of their managed assets, and so on.
There are no rows in this table
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The Journey to 2021 DeFi

Bitcoin in many ways was the first DeFi application. Bitcoin lets you own and control value and send it anywhere around the world. It does this by providing a way for a large number of people, who don't trust each other, to agree on a ledger of accounts without the need for a trusted intermediary. Ethereum builds on this. Like Bitcoin, the rules can't change on you and everyone has access. But it also makes this digital money programmable, using
smart contracts
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, so you can go beyond storing and sending value.
See this Video for full history
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https://www.youtube.com/watch?v=qFBYB4W2tqU&t=10s&ab_channel=Finematics
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How does DeFi work?

DeFi, a L3 application, uses cryptocurrencies and smart contracts to provide services that don't need intermediaries. In today's financial world, financial institutions act as guarantors of transactions. This gives these institutions immense power because your money flows through them. Plus billions of people around the world can't even access a bank account.
In DeFi, a smart contract replaces the financial institution in the transaction. A smart contract is a type of Ethereum account that can hold funds and can send/refund them based on certain conditions. No one can alter that smart contract when it's live – it will always run as programmed.
A contract that's designed to hand out an allowance or pocket money could be programmed to send money from Account A to Account B every Friday. And it will only ever do that as long as Account A has the required funds. No one can change the contract and add Account C as a recipient to steal funds.
Contracts are also public for anyone to inspect and audit. This means bad contracts will often come under community scrutiny pretty quickly.
This does mean there's currently a need to trust the more technical members of the Ethereum community who can read code. The open-source based community helps keep developers in check, but this need will diminish over time as smart contracts become easier to read and other ways to prove trustworthiness of code are developed.

Ethereum and DeFi

Ethereum is the perfect foundation for DeFi for a number of reasons:
No one owns Ethereum or the smart contracts that live on it – this gives everyone an opportunity to use DeFi. This also means no one can change the rules on you.
DeFi products all speak the same language behind the scenes: Ethereum. This means many of the products work together seamlessly. You can lend tokens on one platform and exchange the interest-bearing token in a different market on an entirely different application. This is like being able to cash loyalty points in at your bank.
Tokens and cryptocurrency are built into Ethereum, a shared ledger – keeping track of transactions and ownership is kinda Ethereum's thing.
Ethereum allows complete financial freedom – most products will never take custody of your funds, leaving you in control.
You can think of DeFi in layers:
The blockchain – Ethereum contains the transaction history and state of accounts.
The assets – ETH and the other tokens (currencies).
The protocols – smart contracts that provide the functionality, for example a service that allows for decentralized lending of assets.
The applications – the products we use to manage and access the protocols.

Stable Coin

虽然Ethereum是programmable且提供decentralized infrastructure，但是ETH的币价十分volatile，导致它不能很好的成为价值的衡量metric (i.e. 你不希望今天用3 ETH买的面包，明天就要用5 ETH；你也不希望今天用10ETH买的钻石，明天就只能用1ETH卖出）。
Cryptocurrency volatility is a problem for lots of financial products and general spending. The DeFi community has solved this with stablecoins. Their value stays pegged to an another asset, usually a popular currency like dollars. Stablecoin are designed to be without volatility (though under extreme circumstance this does not hold)
Coins like Dai or USDC have a value that stays within a few cents of a dollar. This makes them perfect for earning or retail. Many people in Latin America have used stablecoins as a way of protecting their savings in a time of great uncertainty with their government-issued currencies.
There are many types of stable coins and each are back by different asset. Below are some general comparisons. Depending on the volatility, stable coins require a varying degree of collaterals to ensure stable price.
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Screen Shot 2021-12-21 at 5.32.55 PM.png
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Screen Shot 2021-12-21 at 5.32.35 PM.png
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Screen Shot 2021-12-21 at 5.33.25 PM.png
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Screen Shot 2021-12-21 at 5.34.03 PM.png
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Putting it Together

DeFi needs 3 major components
Decentralized Infrastructure: ETH just does that; more precisely, smart contract does that. Note that 3rd generation blockchain, like Solana and Avalanche, can also become this infrastructure.
稳定的对价货币：Stable Coin
Decentralized Service (crypto-crypto, or crypto-fiat)
DEX for asset exchange
DMM (Money Market) for borrowing & lending; Yield farming (将Crypto借出去，获得利息）
insurance and derivatives

这三者被叫做Money Lego。通过随意组合，变可以得到当今DeFi的各种金融服务
例：我在一个exchange上将USD兑换成ETH，然后在一个lending protocol上讲这个ETH借贷出去，收取stable coin利息，并购买保险以备不时之需
Bibliography
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https://ethereum.org/en/defi/
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https://ethereum.org/en/stablecoins/
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