Defi Space — The decentralized financial market landscape

Centralization and Decentralization, and its Reasons

  • Architectural centralization/decentralization refers to the physical infrastructure that uses to support the network or system. If it is large enough, the system cannot be tolerated and broken at any time. For example, business organizations are architecturally designed to lean their responsibility to a single person as CEO or a group of people such as the board of directors. As such, it is undeniable that architectural centralization will generally lead to political centralization.
  • Political centralization/decentralization refers to the individual or organization that can control or govern the system. In this analogy, we can think of the US central’s bank monetary policy committee who set the policy rate to impact the world economy.
  • Logical centralization/decentralization. The ax tries to capture the main fundamental foundation of the object. According to Buterin (2017), this refers to the look of interface and data structure in the system: Whether it looks single or group? We can also think of this as “separation.” Will the object be able to be separated by its own if we cut it into half?

The Reason Behind the DeFi

  • Fee: The first thing brought by asset storage is a fee. There are charges for users who transfer crypto assets in and out. Charges go to the miner when moving in and out of a wallet. Executing smart contract has a price, too, according to its complexity (Blummer, 2019).
  • Dilution: Dilution is a problem too for cryptocurrency. There are always new coins generating, which will attract assets and dilute previously owned crypto.
  • Cost of mining: Miners do not work on blockchain for free, especially when they face real-world costs. According to the calculation mentioned in Skvorc (2018), storing data on the blockchain is more expensive than a traditional centralized system. Miners will need to use their distributed coins with real-world money to pay for their real energy/electricity and gas bills. This will lead to more supply of crypto in the market and potentially brings the price down.

Stages of DeFi services

  • Traditional Finance (TradFi): Centralized organizations are run as a business with a clear top-down decision-making organizational structure. Think of banks, hedge funds, almost all corporations, and so on. Under this model, customers have to trust people running the business to be ethically responsible and execute business’s services.
  • Centralized Finance (CeFi): Legacy financial architecture. Centralized finance is digitalized but still requires the user’s trust organization. The organization still has custodial responsibilities. Coinbase, Binance, and a vast number of firms offer CeFi services in the cryptocurrency space.
  • Decentralized Finance (DeFi): Advocates of the DeFi approach argue that the “trust in people” element should be eliminated and replaced by technological solutions, which have become available thanks to the rise of blockchains, smart contracts, and decentralized applications (DApps).

Layers of DeFi services

Challenge of DeFi Ecosystem

  • Cyber Security and Protocol. Ethereum and Bitcoin have been hacked and lead to the hard fork of the system, demonstrated cybersecurity risk. Moreover, Qin et al. (2020) also found out the weak point in the MakerDao protocol. It is yet to be stable. Moreover, increasing users equals an increase in point of attack. There is no guarantee that this unwelcomed event will not occur in the future
  • Network risk. All the DeFi projects are built based on the Ethereum public blockchain network. Therefore, the crash in the infrastructure is also the risk that needs to be a concern here.
  • Smart contracts and decentralized platforms can be upgraded through achieving consensus among key stakeholders to implement significant upgrades, which is often challenging. When consensus is not forthcoming, progress can stall (Chen et al.,2020).
  • High requirements on knowledge of users are also another challenge. Given that the protocol is purely the computer code. A high level of knowledge in a computer language is required in order to understand the protocol deeply. This may challenge the growth of the DeFi ecosystem.
  • It is still costly for computation power. Joining the DeFi system, users must use excessive power to store the data and maintain updates, which would increase the costs of preparing, processing, and storing information. This pattern seems not efficient comparing to CeFi. In currently available applications, the combination use of CeFi and DeFi is frequently observed. CeFi is mostly used as the exchange square to unload individual investors from heavy updating workload while still being able to shop in the DeFi world freely.
  • Even though blockchain technology holds the advantage of transparency. However, privacy might be jeopardized, given its transparency and open access environment. As such, there is a cost and benefits consideration of joining the ecosystem.
  • DeFi is using smart contact to implement the whole financial process and stored in the blockchain technology. This might lead to the inflexibility issue that might cost user expense. Moreover, the smart contract itself is the computer code that is filled with the requirement. Implementing it as the real contract may lack the spirit of the law that lay behind the law’s foundation
  • Lack of accountability is another fundamental issue. Given that the whole system is run by code with no one is responsible for it. When something unexpected happened, users cannot find central entities or regulators to account for. It is also not easy to build trust for users to put valuable assets in DeFi. Accountability is still needed to be developed in DeFi ecosystem.

Prospect financial market



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forbitspace is an interoperability aggregator protocol that unites decentralized applications across disparate blockchains.