DeFi: Complexity of Simplicity

A vital part of the Web3 ecosystem

Decentralized Finance is the most logical development that emerged from the original Bitcoin paper. If we can create a currency that is borderless, untethered to any government, and does not require an intermediary such as a central bank, what’s stopping us from rebuilding a whole financial system?

DeFi is seemingly easy to approach, most of its instruments’ core mechanics mimic those of the traditional finance, yet here’s the catch: working with finance requires some serious education and experience (the hard part is that no book or theory could prepare you for how the real world operates, and years of experience do not guarantee success. Even the most experienced traders can lose everything overnight). The best way to “purchase” an education in the DeFi field is to get various tokens and find out what you can do with them (you may want to start with the most popular ones).

However, it would be incorrect to say that DeFi is “traditional finance, but on blockchain” — as it has so much more. DeFi is not a mindless copy — each tool is reimagined with new capabilities. There are also unique things such as pools, NFTs, credit lines without collaterals, p2p loans, stablecoins, staking and voting with tokens, exchanges. The best part? You’d need a wallet and some tokens to access these — no permissions, no gatekeeping.

Disclaimer: this is not investment advice of any kind. Since we’re building a tech solution, we’re more interested in the technological side of things. Finance is the field where the term “information technology” really shines — it boils down to how various agents make decisions based on the information they have and the resources in their possession.

Given this point of view, the original idea for DeFi could be reframed as: allow more people to participate in financial systems by lowering the entry barrier, solving the information asymmetry and resources inequality with technology. It really rhymes with the Web3 idea of creating more opportunities and power for the people by solving the trust issues with technology at many levels.

Though the DeFi is one of the oldest Web3 applications and has been developing for quite some time now, there are still unsolved challenges.

Right now there’s a strong skew to the “resources” — various mechanisms allow smaller investors to gather into pools, thus gain an edge and make an impact on the market. Decision making process could include DAO voting (as some groups of NFT investors do). We’ll omit the transactions speed and throughput as technicalities for now.

As to the information — here’s where the real problem is (or the opportunity, depends on how you look at it).

First of all, there’s so much going on: various exchanges, pools, chains, bridges, and sub-chains, as well as some individual contracts — all of this requires a set of tools to aggregate, process, and present in an easy to comprehend manner. Turns out, there are still technological barriers that, despite our best attempts, create new challenges in making high quality information and insights available.

Should stress “high quality” — always double check every project, contract, and web-site, don’t fall prey to some “influencers” that make bold promises of overnight success.

The second point of attention is security. There are plenty of angles for a malicious actor to attack. Social engineering is one thing, who knows, what one can do with the financial data that is transparent and open. The other is how do we protect such amounts of information that is handled by multiple agents, transformed, and stored in a multitude of ways?

The most vulnerable part right now is information processing. You could encrypt the info you don’t want to keep in the open, even store it in a decentralized way, but right now there’s no Web3 solution that would allow to process information in a secure way (meaning no agent could gain access to it, temper with it, make an unauthorised copy, etc.).

That’s why we’ve started Super Protocol — a Web3 native computations platform that will enable secure processing for data of any kind. DeFi is just one of the use cases.

Dive into our channels to learn more!