Decentralized Finance: The apocalyptic event for the traditional financial institutions

By Fouad Sabry

What Is Decentralized Finance

Decentralized Finance is a blockchain-based form of finance that does not rely on central financial intermediaries such as brokerages, exchanges, or banks to offer traditional financial instruments, and instead utilizes smart contracts on blockchains, the most common being Ethereum.

There are some major advantages of using DeFi, including cost, speed and security. Anyone with an internet connection has access to blockchains and cryptocurrencies. Users are able to make trades and move their assets whenever they want without having to wait on bank transfers or pay bank fees.

Decentralized finance is quickly rising as a more secure, more transparent, and more efficient alternative to traditional financial services. By eliminating the need for centralized financial institutions, we create a more open and trustworthy financial system, and one that's far more accessible.

Therefore, decentralized finance is a very near equivalent of an apocalyptic event for the traditional financial institutions.

How You Will Benefit

(I) Insights, and validations about the following topics:

Chapter 1: Decentralized Finance
Chapter 2: Blockchain
Chapter 3: Smart Contract
Chapter 4: Cryptocurrency
Chapter 5: Virtual Currency
Chapter 6: Central Bank Digital Currency
Chapter 7: E-Democracy
Chapter 8: Ethereum
Chapter 9: Bitcoin
Chapter 10: Diem (digital Currency)

(II) Answering the public top questions about decentralized finance.
(III) Real world examples for the usage of decentralized finance in many fields.
(IV) 17 appendices to explain, briefly, 266 emerging technology in each industry to have 360-degree full understanding of decentralized finance' technologies.

Who This Book Is For

Professionals, undergraduate and graduate students, enthusiasts, hobbyists, and those who want to go beyond basic knowledge or information for any kind of decentralized finance.

• Language: English
• Publisher: One Billion Knowledgeable
• Release date: Nov 25, 2021

Book preview

Decentralized Finance

Other Books by The Author

1 – Smart Machines

2 – Brain Computer Interface

3 – Swarm Intelligence

4 – Autonomous Vehicles

5 – Autonomous Drones

6 – Autonomous Robotics

7 – Autonomous Weapons

8 – Agricultural Robotics

9 – Closed Ecological Systems

10 – Cultured Meat

11 – Vertical Farming

12 – Plasma Propulsion

13 – Pulse Detonation Engine

14 – Arcology

15 – 4D Printing

16 – Domed City

17 – Distributed Ledger

18 – Digital Currency

19 – Decentralized Finance

Series by The Author

Emerging Technologies in Information Technology

1 – Smart Machines

Emerging Technologies in Neuroscience

1 – Brain Computer Interface

Emerging Technologies in Robotics

1 – Swarm Intelligence

Emerging Technologies in Autonomous Things

1 – Autonomous Vehicles

2 – Autonomous Drones

3 – Autonomous Robotics

4 – Autonomous Weapons

Emerging Technologies in Agriculture

1 – Agricultural Robotics

2 – Closed Ecological Systems

3 – Cultured Meat

4 – Vertical Farming

Emerging Technologies in Space

1 – Plasma Propulsion

2 – Pulse Detonation Engine

Emerging Technologies in Construction

1 – Arcology

2 – 4D Printing

3 – Domed City

Emerging Technologies in Finance

1 – Distributed Ledger

2 – Digital Currency

3 – Decentralized Finance

One Billion Knowledgeable

Decentralized Finance

The apocalyptic event for the traditional financial institutions

Fouad Sabry

Copyright

Decentralized Finance Copyright © 2021 by Fouad Sabry. All Rights Reserved.

All rights reserved. No part of this book may be reproduced in any form or by any electronic or mechanical means including information storage and retrieval systems, without permission in writing from the author. The only exception is by a reviewer, who may quote short excerpts in a review.

Cover designed by Fouad Sabry.

This book is a work of fiction. Names, characters, places, and incidents either are products of the author’s imagination or are used fictitiously. Any resemblance to actual persons, living or dead, events, or locales is entirely coincidental.

Bonus

You can send an email to [e-mail] with the subject line Decentralized Finance: The apocalyptic event for the traditional financial institutions, and you will receive an email which contains the first few chapters of this book.

Fouad Sabry

Visit 1BK website at

www.1BKOfficial.org

Preface

Why did I write this book?

The story of writing this book started on 1989, when I was a student in the Secondary School of Advanced Students.

It is remarkably like the STEM (Science, Technology, Engineering, and Mathematics) Schools, which are now available in many advanced countries.

STEM is a curriculum based on the idea of educating students in four specific disciplines — science, technology, engineering, and mathematics — in an interdisciplinary and applied approach. This term is typically used to address an education policy or a curriculum choice in schools. It has implications for workforce development, national security concerns and immigration policy.

There was a weekly class in the library, where each student is free to choose any book and read for 1 hour. The objective of the class is to encourage the students to read subjects other than the educational curriculum.

In the library, while I was looking at the books on the shelves, I noticed huge books, total of 5,000 pages in 5 parts. The books name is The Encyclopedia of Technology, which describes everything around us, from absolute zero to semiconductors, almost every technology, at that time, was explained with colorful illustrations and simple words. I started to read the encyclopedia, and of course, I was not able to finish it in the 1-hour weekly class.

So, I convinced my father to buy the encyclopedia. My father bought all the technology tools for me in the beginning of my life, the first computer and the first technology encyclopedia, and both have a great impact on myself and my career.

I have finished the entire encyclopedia in the same summer vacation of this year, and then I started to see how the universe works and to how to apply that knowledge to everyday problems.

My passion to the technology started mor than 30 years ago and still the journey goes on.

This book is part of The Encyclopedia of Emerging Technologies which is my attempt to give the readers the same amazing experience I had when I was in high school, but instead of 20th century technologies, I am more interested in the 21st century emerging technologies, applications, and industry solutions.

The Encyclopedia of Emerging Technologies will consist of 365 books, each book will be focused on one single emerging technology. You can read the list of emerging technologies and their categorization by industry in the part of Coming Soon, at the end of the book.

365 books to give the readers the chance to increase their knowledge on one single emerging technology every day within the course of one year period.

Introduction

How did I write this book?

In every book of The Encyclopedia of Emerging Technologies, I am trying to get instant, raw search insights, direct from the minds of the people, trying to answer their questions about the emerging technology.

There are 3 billion Google searches every day, and 20% of those have never been seen before. They are like a direct line to the people thoughts.

Sometimes that’s ‘How do I remove paper jam’. Other times, it is the wrenching fears and secret hankerings they would only ever dare share with Google.

In my pursuit to discover an untapped goldmine of content ideas about Decentralized Finance, I use many tools to listen into autocomplete data from search engines like Google, then quickly cranks out every useful phrase and question, the people are asking around the keyword Decentralized Finance.

It is a goldmine of people insight, I can use to create fresh, ultra-useful content, products and services. The kind people, like you, really want.

People searches are the most important dataset ever collected on the human psyche. Therefore, this book is a live product, and constantly updated by more and more answers for new questions about Decentralized Finance, asked by people, just like you and me, wondering about this new emerging technology and would like to know more about it.

The approach for writing this book is to get a deeper level of understanding of how people search around Decentralized Finance, revealing questions and queries which I would not necessarily think off the top of my head, and answering these questions in super easy and digestible words, and to navigate the book around in a straightforward way.

So, when it comes to writing this book, I have ensured that it is as optimized and targeted as possible. This book purpose is helping the people to further understand and grow their knowledge about Decentralized Finance. I am trying to answer people’s questions as closely as possible and showing a lot more.

It is a fantastic, and beautiful way to explore questions and problems that the peoples have and answer them directly, and add insight, validation, and creativity to the content of the book – even pitches and proposals. The book uncovers rich, less crowded, and sometimes surprising areas of research demand I would not otherwise reach. There is no doubt that, it is expected to increase the knowledge of the potential readers’ minds, after reading the book using this approach.

I have applied a unique approach to make the content of this book always fresh. This approach depends on listening to the people minds, by using the search listening tools. This approach helped me to:

Meet the readers exactly where they are, so I can create relevant content that strikes a chord and drives more understanding to the topic.

Keep my finger firmly on the pulse, so I can get updates when people talk about this emerging technology in new ways, and monitor trends over time.

Uncover hidden treasures of questions need answers about the emerging technology to discover unexpected insights and hidden niches that boost the relevancy of the content and give it a winning edge.

Stop wasting time on gutfeel and guesswork about the content wanted by the readers and fill the book content with what the people need and say goodbye to the endless content ideas based on speculations.

Make solid decisions, and take fewer risks, to get front row seats to what people want to read and want to know — in real time — and use search data to make bold decisions, about which topics to include and which topics to exclude.

Streamline my content production to identify content ideas without manually having to sift through individual opinions to save days and even weeks of time.

It is wonderful to help the people to increase their knowledge in a straightforward way by just answering their questions.

I think the approach of writing of this book is unique as It collates, and tracks the important questions being asked by the readers on search engines.

Acknowledgments

Writing a book is harder than I thought and more rewarding than I could have ever imagined. None of this would have been possible without the work completed by prestigious researchers, and I would like to acknowledge their efforts to increase the knowledge of the public about this emerging technology.

Dedication

To the enlightened, the ones who see things differently, and want the world to be better -- they are not fond of the status quo or the existing state. You can disagree with them too much, and you can argue with them even more, but you cannot ignore them, and you cannot underestimate them, because they always change things... they push the human race forward, and while some may see them as the crazy ones or amateur, others see genius and innovators, because the ones who are enlightened enough to think that they can change the world, are the ones who do, and lead the people to the enlightenment.

Epigraph

Decentralized Finance is:

- A global, open alternative to the current financial system.

- Many products that let you borrow, save, invest, trade, and more.

- Based on open-source technology that anyone can program with.

Decentralized Finance is an open and global financial system built for the internet age – an alternative to a system that's opaque, tightly controlled, and held together by decades-old infrastructure and processes. It gives you control and visibility over your money. It gives you exposure to global markets and alternatives to your local currency or banking options. Decentralized Finance products open up financial services to anyone with an internet connection and they're largely owned and maintained by their users. So far tens of billions of dollars worth of crypto currency has flowed through Decentralized Finance applications and it's growing every day.

Decentralized Finance is a collective term for financial products and services that are accessible to anyone who can use Ethereum – anyone with an internet connection. With Decentralized Finance, the markets are always open and there are no centralized authorities who can block payments or deny you access to anything. Services that were previously slow and at risk of human error are automatic and safer now that they're handled by code that anyone can inspect and scrutinize.

Table of Contents

Decentralized Finance

Other Books by The Author

Series by The Author

Decentralized Finance

Copyright

Bonus

Preface

Introduction

Acknowledgments

Dedication

Epigraph

Table of Contents

Chapter 1: Decentralized Finance

Chapter 2: Blockchain

Chapter 3: Smart Contract

Chapter 4: Cryptocurrency

Chapter 5: Virtual Currency

Chapter 6: Central Bank Digital Currency

Chapter 7: E-Democracy

Chapter 8: Ethereum

Chapter 9: Bitcoin

Chapter 10: Diem (digital Currency)

Epilogue

About the Author

Coming Soon

Appendices: Emerging Technologies in Each Industry

Chapter 1: Decentralized Finance

Decentralized finance (abbreviated DeFi) is a blockchain-based form of finance that does not rely on central financial intermediaries such as brokerages, exchanges, or banks to provide traditional financial instruments, instead relying on smart contracts on blockchains, the most common of which is Ethereum. People can use DeFi platforms to lend or borrow money from others, bet on the price fluctuations of a variety of assets using derivatives, trade cryptocurrencies, insure against risks, and earn interest in savings-like accounts. DeFi employs a layered architecture and extremely modular building elements. Some DeFi applications advertise large interest rates while posing a considerable danger. By October 2020, about $11 billion (in cryptocurrency) had been deposited in various decentralized finance protocols, representing a more than tenfold increase over the course of the year. DeFi had received around $20.5 billion in investment as of January 2021.

History

MakerDAO, a stablecoin-based lending platform, is recognized as being the first DeFi application to see widespread use. It enables users to borrow Dai, the platform's native cryptocurrency that is pegged to the US dollar. MakerDAO aspires to maintain the steady value of Dai in a decentralized and autonomous manner by utilizing a series of smart contracts on the Ethereum blockchain that manage the lending, repayment, and liquidation procedures.

Compound Finance began paying lenders and borrowers of cryptocurrencies on its platform in June 2020, in addition to standard interest payments, with units of a new cryptocurrency known as the COMP token, which is used for platform governance but is also tradeable on exchanges. Other platforms quickly followed suit, ushering in the phenomenon known as yield farming or liquidity mining, in which speculators actively shift cryptocurrency assets between different pools within a platform and between platforms in order to maximize their total yield, which includes not only interest and fees but also the value of additional tokens received as rewards.

The Washington Post published a primer on decentralized finance in July 2020, featuring information on yield farming, returns on investments, and the hazards involved. Bloomberg reported in September 2020 that DeFi accounted for two-thirds of the cryptocurrency market in terms of price movements, and that DeFi collateral levels had reached $9 billion. Because of the rising interest in DeFi, Ethereum saw an increase in developers in 2020.

Large cryptocurrency venture capitalists including as Andreessen Horowitz, Bain Capital Ventures, and Michael Novogratz have invested in DeFi.

Key characteristics

DeFi relies around decentralized programs, also known as DApps, that execute financial activities on distributed ledgers known as blockchains, a technology popularized by Bitcoin and since adopted more generally. Rather than going through a centralized intermediary like a cryptocurrency exchange or a regular Wall Street securities exchange, transactions are done directly between participants, mediated by smart contract programs. These smart contract programs, also known as DeFi protocols, are often powered by open-source software created and maintained by a developer community.

DApps are often accessed via a Web3 enabled browser plugin or program, such as MetaMask, which allows users to interact directly with the Ethereum blockchain via a digital wallet. Many of these DApps can communicate with one another to provide complicated financial services. Stablecoin holders, for example, might lend assets such as USD Coin or DAI to a liquidity pool in a borrow/lending protocol such as Aave, and then allow others to borrow those digital assets by depositing their own collateral, which is often greater than the loan amount. The protocol automatically modifies interest rates based on the asset's current demand.

Aave has offered flash loans, which are uncollateralized loans of any size that be taken out and proven to be repaid in a single blockchain transaction. While flash loans can have legitimate purposes such as arbitrage, collateral swap, self-liquidation, and unwinding leveraged positions, various DeFi platform attacks have exploited flash loans to manipulate bitcoin market prices.

Uniswap is another DeFi technology that is a decentralized exchange (DEX) that works on the Ethereum blockchain. Uniswap enables the exchange of hundreds of different ERC20 tokens released on the Ethereum network. Instead of employing a centralized exchange to fill orders, Uniswap incentivizes users to form liquidity pools in exchange for a share of the trading fees collected by traders switching tokens in and out of the liquidity pools.

These liquidity pools enable users to transfer funds from one token to another in a completely decentralized manner while preserving control over their cash. Simultaneously, liquidity providers are urged to deposit tokens in exchange for a share of the exchange fees. After pooling their tokens, liquidity providers can be fully passive because the smart contract automatically adjusts the liquidity-providing logic based on the current market price.

Thus, DEXs are powered by autonomous market makers that are based on mathematical algorithms, allowing the exchange rate between two assets to be estimated by taking into account the liquidity existing on the protocol.

The operation of Uniswap liquidity pools is simple. Liquidity providers deposit a pair of assets, such as the USDT / ETH pair, on Uniswap. The protocol mandates a 50/50 split, thus when a user adds 1 ETH to this pair, they must also provide the corresponding value in USDT. Uniswap employs an automated market maker algorithm to ensure the protocol's long-term liquidity. This means that the amount paid during a swap is determined by the ratio of the two tokens in the pool (in our case, USDT / ETH).

Even if liquidity providers gain transaction fees, they face the danger of losing money because to temporary loss. Indeed, the decentralized and self-sufficient nature of AMM pools comes at a price: AMM contracts are constantly ready to supply liquidity but also lacking access to a source that indicates the ‘true price' of the assets involved. Arbitrageurs: agents that exploit price disparities throughout the market, keep AMM prices in line with the rest of the market. The arbitrageur's gain is the liquidity provider's loss, which does not change when trading fees are considered, because arbitrageurs only trade when it is beneficial for them. This loss is not borne by investors who hold their tokens in their personal wallets. Overall, liquidity providers had a nil net return due to temporary loss in the first half of 2021.

Because there is no centralized party running Uniswap (the platform is ultimately regulated by its users), and any development team can exploit the open-source software, there is no entity to check the identities of those utilizing the site in order to comply with KYC/AML standards. It is unclear what regulators will say about the legality of a platform like Uniswap.

Criticism

Because blockchain transactions are irreversible, an improper transaction using a DeFi platform or even the deployment of smart-contract code with faults cannot always be easily reversed. Coding mistakes and hacks are widespread. In 2020, one platform known as Yam Finance swiftly raised its deposits to $750 million before imploding owing to a coding mistake just days after introduction. Furthermore, the code for the smart contracts that operate DeFi platforms is typically open-source software that can be easily duplicated to put up competing platforms, causing instabilities as funds transfer from platform to platform.

The person or entity behind a DeFi protocol may be unknown and may vanish with the money of investors. Some DeFi protocols have been labeled as Ponzi-like by investor Michael Novogratz.

DeFi has been connected to the 2017 initial coin offering craze, which was a component of the 2017 cryptocurrency bubble. Due to the expertise necessary to connect with such platforms and the lack of a middleman with a customer-support department, inexperienced investors are especially vulnerable to losing money when using DeFi platforms.

{End Chapter 1}

References

What is DeFi and CeFi?. Retrieved 2021-09-06.

Why 'DeFi' Utopia Would Be Finance Without Financiers: QuickTake. Bloomberg. 2020-08-26. Retrieved 2020-10-06.

Schär, Fabian (2021). Decentralized Finance: On Blockchain- and Smart Contract-Based Financial Markets. Review. 103 (2). doi:10.20955/r.103.153-74. Retrieved 2021-04-17.

'DeFi' movement promises high interest but high risk. Financial Times. 2019-12-30. Retrieved 2020-10-06.

Ehrlich, Steven. Leading 'Privacy Coin' Zcash Poised For Growth Following Placement On Ethereum. Forbes.

Ponciano, Jonathan. Ether's Market Value Surges $20 Billion In One Day While Bitcoin Prices Slow–Here's Why. Forbes.

The Maker Protocol: MakerDAO's Multi-Collateral Dai (MCD) System. MakerDAO. Retrieved 2021-06-18.

Why 'DeFi' Utopia Would Be Finance Without Financiers: QuickTake. Bloomberg.com. 2020-08-26. Retrieved 2021-01-26.

Stabile, Daniel T.; Prior, Kimberly A.; Hinkes, Andrew M. (2020-07-31). Digital Assets and Blockchain Technology: US Law and Regulation. Edward Elgar Publishing. ISBN 978-1-78990-744-5.

What's 'Yield Farming'? (And How Do You Grow Crypto?). The Washington Post. 2020-07-31. Retrieved 2020-10-05.

Crypto Is Beating Gold as 2020's Top Asset So Far. Bloomberg. 2020-09-22. Retrieved 2020-10-05.

Coders Flock Back to Crypto Projects With Prices Surging Again. Bloomberg.com. 10 December 2020.

Novogratz Plows Ahead In DeFi Amid the 'Gamifying' of Crypto. Bloomberg. 2020-09-29. Retrieved 2020-10-06.

Decentralized Finance (DeFi): An Emergent Alternative Financial Architecture. Regulation of Financial Institutions eJournal. Social Science Research Network (SSRN). Accessed 20 April 2021.

Crypto Exchange Gets Millions After Copy-Paste of a Rival's Code. Bloomberg. 2020-09-11. Retrieved 2020-10-06.

Schroeder, Stan. Crypto wallet MetaMask finally launches on iOS and Android, and it supports Apple Pay. Mashable.

MetaMask's Blockchain Mobile App Opens Doors For Next-Level Web. Bloomberg.com. 2 September 2020.

Wilson, Tom (2020-08-26). Boom or bust? Welcome to the freewheeling world of crypto lending. Reuters. Retrieved 2021-04-08.

Flash Loans Are Providing Instant Cash to Crypto Speculators. Bloomberg.com. 2021-02-07. Retrieved 2021-04-08.

Evans, Jon (February 18, 2020). DeFiance: billion dollar finance, million dollar hacks, and very little value. TechCrunch. Retrieved 22 November 2020.

Genie, BowTied. Part 1: Introduction to Automatic Market Makers and Liquidity Pools. medium.com. Medium.

Boueri, Nassib. G3M Impermanent Loss Dynamics. arxiv.org. Arxiv.

Kharif, Olga. DeFi Boom Makes Uniswap Most Sought-After Crypto Exchange. Bloomberg.com. Bloomberg.

Boom or bust? Welcome to the freewheeling world of crypto lending. Reuters. 2020-08-26. Retrieved 2020-10-06.

Braun, Alexander; Cohen, Lauren H.; Xu, Jiahua (May 2020). fidentiaX: The Tradable Insurance Marketplace on Blockchain. Harvard Business School. Retrieved 2021-01-05.

Chapter 2: Blockchain

Diagram Description automatically generated with medium confidence

Bitcoin blockchain structure

A blockchain is a growing collection of documents known as blocks that are connected together using cryptography. It is sometimes referred to as a trustless and fully decentralized peer-to-peer immutable data storage that is distributed throughout a network of participants known as nodes. Each block includes a cryptographic hash of the preceding block, a timestamp, and transaction data (which is typically written as a Merkle tree). The timestamp demonstrates that the transaction data existed at the time the block was published in order to be included in its hash. Because each block contains information about the one before it, they form a chain, with each new block reinforcing the ones before it. As a result, blockchains are resistant to data tampering since, once recorded, the contents in any one block cannot be changed retrospectively without affecting all subsequent blocks.

Blockchains are often administered via a peer-to-peer network for use as a publicly distributed ledger, with nodes adhering to a protocol in order to communicate and validate new blocks. Although blockchain records are not unchangeable due to the possibility of forks, blockchains may be deemed secure by design and illustrate a distributed computing system with strong Byzantine fault tolerance.

In 2008, a person (or group of persons) going by the name Satoshi Nakamoto created the blockchain to serve as the public transaction record for the cryptocurrency bitcoin. Satoshi Nakamoto's identity is still unclear to this day. With the creation of the blockchain for bitcoin, it became the first digital money to address the double-spending problem without the use of a trusted authority or central server. The