The Blockchain Promotion Association [BCCC] held the first Joint Finance & Token Economy Working Group on March 26. In preparation for the spread of the new coronavirus, a regular online session was held. Originally, the subcommittee is a regular seminar held for association members, but non-members can participate until the end of April for those interested in blockchain.

This session was hosted by BCCC evangelist and Tatsuo Oku, Chairman of the Token Economy Division, and led by Taisuke Horiji, Japan director of Kyber Network, which develops on-chain liquidity protocols, as a lecturer. He gave a lecture titled "1st DeFi" on the theme of finance [Decentralized Finance].

How decentralized finance was born

Kyber Network, based in Singapore, will head up DeFi-related projects and communities of the same name. Horiji is the representative of Japan.

Horiji explains the history of DeFi to understand DeFi.

First, Horiji says that the key point for DeFi was the birth of Ethereum. Vetarik Buterin, the creator of Ethereum, said in the mechanism of blockchain technology that "Bitcoin is like a calculator specialized for one function." He wanted to create a moving blockchain, "he said. He created Ethereum, a blockchain that implements smart contracts.

Smart contracts have created an environment where anyone can build applications on the public chain, and many developers have developed distributed applications [DApps] using Ethereum. Eventually, an ICO boom will be issued to raise tokens and raise investors on Ethereum to raise funds for DApps development. The boom has gone, despite the fact that the ICO did in a global environment, but was often fraudulent, resulting in a loss of social credibility. However, it has created a number of tokens on Ethereum.

With the birth of these various tokens, the decentralized exchange "DEX" by DApps for the purpose of token exchange has appeared. Until now, exchange of virtual currency and tokens was usually done through virtual currency exchanges, but with the advent of DEX, token exchange by decentralized centralization is possible without sending to virtual currency exchanges It has become. That's about 2018. DEX is a decentralized financial agenda.

Horiji says DApps has become more familiar with the advent of DEX. DApps are getting more and more attention. More and more developers will be able to use DApps to create more functional financial apps, and the DeFi community will be born in August 2018.

With the creation of the community, the term DeFi was first used. This is the beginning of DeFi. The open and public community is not a partnership but a gathering for decentralized financial product development. Anyone can join and a place where everyone can talk about the financial platform.

Actual product example

Horiji introduced some actual DeFi products.

First, he named "Maker DAO" as one of the most famous DeFi products. Ethereum's decentralized financial MakerDAO issues a dollar peg stablecoin DAI with a value of 1 DAI = 1 dollar, backed by Ethereum [current Maker DAO also supports other virtual currencies].

What makes Maker DAO unique is that it uses virtual currency as collateral. Mr. Horiji explains that Maker DAO is a decentralized financial system that adjusts the supply and demand balance of DAI according to issuance fees and interest rates without creating a depositor and automatically issues DAI near 1 DAI = 1 dollar. I do. Maker DAO, which does not depend on a specific subject, has become indispensable for other DeFi development.

Also introduced is the lending protocol “Compound”. Compound is a loan protocol for DeFi applications that lend and borrow cryptocurrencies. Lenders pool unused cryptocurrencies and borrowers borrow cryptocurrencies from the pool to pay interest. Roughly, he says, a smart contract that works like a banking business. The point is that the interest rate is automatically calculated from the supply and demand balance. The interest earned is split by the lender who provided the virtual currency to the pool. This is also automated.

There are also apps called "Set" such as investment trusts and ETFs [exchanged investment trusts]. Set automatically rebalances the cryptocurrency portfolio. Specifically, if you want to keep the asset value of the virtual currency at 50% by DAI and 50% by Bitcoin, use [purchase] a Set of “50:50 DAI and BTC”. Set refers to the price information and automatically executes trading as specified. Users simply select and purchase their favorite strategy [Set], and they can do things like investment trusts in virtual currency.

At present, these DeFi products are particularly noticeable.

About the difference between DeFi and ordinary finance

Horiji says that DeFi is very different from traditional finance in that it is programmable money that automates finance.

DeFi allows smart contracts to automate finance according to predetermined rules. Moreover, since they are of a distributed type, they can be automatically executed without the intervention of a third party. Automating finance with DeFi is said to eliminate cumbersome manual tasks and increase efficiency at the same time.

You can easily exchange a wide variety of currencies, exchange value with anyone anywhere in the world, and automate advanced asset management such as leverage and lending. Also, because it is a public chain, the technology that can realize an open financial system without anyone's permission is a big difference from conventional finance.

Horiji summarizes DeFi's characteristics as "automatic finance," "access-free finance," and "creation-free finance."

The first type of automatic financing is an element that is automatically executed according to a program. Brings efficiency and trustlessness to finance.

Second, free finance means that you can access from anywhere with an Internet connection and a smartphone, regardless of borders or positions. Some countries around the world do not trust their currencies, but regardless of that, DeFi says that anyone can exchange and store value.

Third, creative freedom finance means that no major resources or qualifications are required to develop and deliver applications. You don't need the massive system of traditional finance, you can ride Ethereum security, or you can write your own code and participate. You can open your door to the whole world. Horiji emphasizes that the ability to integrate freely with other DeFi products is also a major feature.

DeFi problems and issues to be solved

Finally, Horiji addresses DeFi's problems. We've seen the good things about DeFi so far, but say that DeFi has a lot of challenges to solve, as it's evolving. She said she needed to treat her with the image of being a newborn baby.

DEX, etc. has been done, transactions have increased recently, and the amount of virtual currency locked for DeFi has also increased, but the daily trading volume of DEX is 2% of the trading volume of the world's largest virtual currency exchange It is about degree.

Although it is convenient to be a service that is automated and decentralized by smart contracts, there are also issues such as who will be responsible if there is a bug in the code and some loss occurs. He cited this as an issue.

DeFi says that it is more likely to make losses through holes in bugs and specifications than fear of hacking. The loss of MakerDAO's DAI caused by the recent financial market crash caused by the recent spread of the new coronavirus infection was due to unexpectedly large declines in smart contracts [see related article]. He also mentioned a case where a Flash Loan DeFi service was abused [using a hole in the specification], but only because there were issues due to the complexity of the content, Horiji reported.

Moderator Okushi commented that these incidents were famous, and although she knew well that it had happened, it was very difficult to understand the contents and reasons. He asked Horiji again to explain these as DeFi seminars at the meeting. The regular online session has ended, with some opinions saying that he wants to hear about the DeFi product Kyber Network, which he works on next time. While the dreams of DeFi's future grew, I was able to understand that the challenges were great.


Shane is an economics and mathematics double major with a keen eye for the financial world. His understanding of the current economic model of different countries is enlightening and he aims to bring that impressive knowledge and experience into his writing. He is currently exploring writing about different genres within the entertainment, business and cryptocurrency sphere and aims to bring diversity in his writing.

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