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The rise of cryptocurrencies can be traced back to a whitepaper written by Satoshi Nakamoto outlining his vision for an electronic cash system called blockchain. This paper led him into creating Bitcoin, which is the first cryptoasset ever created and exists today as one unit within cryptocurrency wallets around world! Alongside this development many other blockchains were developed with their respective assets becoming popular among traders due in part because they offer automated contracts through pre-defined protocols hosted on these smart contracting platforms known as “smart contract”s. One landmark moment was when Ethereum came along boosting speeds beyond imagination while also being instrumental towards fostering DeFi environments where investors could store wealth securely without any third party interference
# What is DeFi?
The term DeFi refers to the financial applications run by smart contracts on a blockchain. While CeFi relies on the private records of intermediaries, such as centralised exchanges and other platforms, DeFi records all the contractual and transaction details on the blockchain. This key difference between DeFi and CeFi lies in whether the financial service is automated via smart contracts on a blockchain or is provided by centralised intermediaries.
The removal of intermediaries is one way DeFi aims to provide financial services without using centralised entities. Namely, it digitises and automates the contracting processes which according to its proponents could in future improve efficiency by reducing some layers between parties involved- an important point given today’s high levels or corruption seen throughout society not just here but also around world with many people having lost faith when dealing directly from banks due too much complexity causing transaction delays while paying Premium
# DeFi Needs Improvements with Decentralization
DeFi purports to be decentralised, but in reality it is not completely so. This is because centralised elements still exist within the governance frameworks of various platforms.
These governing frameworks allow for decision-making by holders of “governance tokens”, which gives some control to large token holders and platform developers. Additionally, the design of some DeFi blockchains favours concentration of power among a few large coin holders.
This is because validators need to be compensated sufficiently in order to be incentivized not to commit fraud, and blockchains based on proof-of-stake allow for validators to stake more coins for a higher chance of winning compensation. Furthermore, many blockchains allocate a large portion of their initial coins to insiders, exacerbating the issue of power concentration.
# Tornado Cash is a true Example of Decentralization
The US Treasury’s Office of Foreign Assets Control (OFAC) has announced that it has sanctioned virtual currency mixer Tornado Cash. The move marks the first time that OFAC has taken action against a digital asset service provider. Tornado Cash is a decentralized platform that enables users to mix their ETH and ERC-20 tokens, making it difficult for third parties to trace the transactions. According to OFAC, the platform has been used by criminals to launder money and avoid sanctions. Despite US sanctions the Tornado Cash IPFS is still functional because it’s decentralized and can be accessed from IPFS.
For those who value their privacy, Tornado Cash is decentralized and noncustodial, meaning that users retain complete control over their funds. It also uses a smart contract solution to deposit and withdraw ERC-20 tokens and ETH, with different addresses for each. This enhances transaction privacy by making it difficult to trace the movement of funds between addresses. And if that wasn’t enough, the protocol also generates a secret hash whenever a user makes a deposit. This hash is used to prove ownership when withdrawing funds, ensuring that even the platform itself can’t link a user’s deposit and withdrawal addresses.
DeFi will revolutionize finance, but isn’t decentralized enough. The infrastructure is still centrally controlled by a few popular entities. When there’s a power struggle, the centralized infrastructure can shut down the network or take it over. On the other hand, if DeFi becomes fully decentralized, it would be much more difficult for any one entity to control the network. This would make it more resilient to attacks and censorship. Furthermore, decentralization would allow users to have more control over their data and privacy. The downside is that decentralization can also lead to disorganization and chaos. It remains to be seen whether DeFi can strike the right balance between centralization and decentralization.
