Fundamental, Technical Criteria for a Well-Functioning DeFi System: Are they available?
“Decentralization sounds great as long as the participants do not exercise dominance over each other.”
There have been more and more projects getting launched recently that have a goal to create a decentralized financial system. This concept that we call “decentralized finance” is not equal in itself to the one that most of the projects preach. Decentralization and the associated financial approach have fundamentally been achieved by the creation of Bitcoin and Ethereum. The real question is what will these new projects add to the fundamental, technical developments that many of the worthiest projects have been already possessing for years? How much is marketing, and how much are actual facts?
I would rather not close this question with a couple of sentences, although it would be quite simple as practical implementation and theoretical ideas are once again very far away from each other. I feel as though we have gone back in time to mid-2017, and I see once more that crypto trading is moving in a direction where real value creation does not become realized.
In my previous writings, I have already explained that cryptocurrency as an exchange market/speculative product is a short-term objective; without having real value it is guaranteed to result in losses. We know this from the events of 2017 when people invested millions of dollars in cryptocurrency projects hoping that these projects would revolutionize the world. It might be a little bit of an exaggeration, but we can say that almost none of those enticing promises have come true.
We can currently see that the so-called DeFi projects have started to follow the same path. That is, with the absence of tangible results, they have been trying to maximize profits via exchange trading by building on tempting ideas. Obviously, there could be some positive effects of this ongoing madness, but the negative ones will also be unavoidable; the consequences of which would be quite difficult to predict precisely, but one might have an idea regarding the outcome.
Let’s look at what exactly a DeFi system would need to have so that we can talk about a technology that works transparently, efficiently, and can provide a stable basis for current ideas. In my opinion, creating pools with the goal that these pools will generate profits and that they will become controlled jointly by investors is, for me, right at the same level as a pyramid scheme. The money machine is not the same as creating a decentralized financial system.
A decentralized financial system will only make sense if it cannot be abused or misused. We can criticize the centralized system all day, but the concept of objective responsibility is there, while decentralization does not possess it. Of course, banks generate huge profits via their financial services, but in return — if all goes well –, they guarantee a standard condition which is about overseeing and operating the system. As for me, I believe that Satoshi Nakamoto must have known that after a certain time — when the Bitcoin system reaches a particular level — mining can only be managed by employing a centralized approach. The source code of Bitcoin is obviously decentralized, but in practice, mining is controlled by only a few participants. Is it okay this way? It might be, or it might not be…
Moving back to my primary train of thought, a DeFi system does not only need to be accessible to everyone, but it also needs to be safe and secure. This requires knowledge; knowledge that is currently nowhere to be found on the crypto-market. So, how could we make a system accessible to everyone in a way that the possibility of the formation of internal enemies within the system is eliminated? When it comes to networks as large as Bitcoin or Ethereum, the size of the network could offer partial security. However, if a project wishes to achieve long-term success, its own solutions also need to play a role in achieving objectives and results.
We cannot ignore having to solve the scalability problem, as without solving it, it is not possible to carry out a wide range of operational activities on the blockchain. However, this might not be as relevant for Bitcoin as it is, say, for Ethereum. Bitcoin’s goal is TX operation and to maximize it profit-wise. On the other hand, Ethereum is willing to promise more. Thanks to smart contracts, thousands of projects want to realize their business objectives on the Ethereum blockchain. Is Ethereum able to fulfil this? Does it really have as much potential as most people hope for?
Last but not least, we have come to the most delicate and the most critical part, i.e., smart contracts. A token that connects to the network through a smart contract does not equate to making extensive use of the potential residing in the blockchain. It means that a decentralized financial system, where we want to produce innovative solutions with a real value aside from putting things from one pool to another, should have much more specific smart contracts than what Ethereum is currently able to provide.
All in all, we can conclude that the DeFi projects/tokens that we know today are much more marketing products with the goal of exchange trading than blockchain solutions possessing technological innovations with revolutionary ideas. That’s exactly why I am looking with skepticism at this enormous enthusiasm that many people show while following the situation. For me, happiness would come from seeing innovations that are necessary for an efficiently working DeFi system to become realized.
Although we always say that our goal with the Decentralized Cloud Blockchain (DCB) is data storage, we should not ignore the fact that the DCB and the associated smart contract system are the basis of everything that the currently known DeFi systems are talking about. Thanks to our RIFT Protocol and our Command Chain Protocol (C2P), the DCB will be the best platform available on the market to provide safe and efficient operation for DeFi projects.