Digital innovation has been of immense benefit in enhancing the financial system but at the same time its architecture has hardly revolutionized being mono-centric. An alternative entails decentralized finance (DeFi, as it is pronounced in English). They follow the transactions in the public blockchain networks without using centralized facilities of service providers, including custodians, clearinghouses, or depositories. Smart contracts—just computer code instructions—presume such functions. Public blockchains store this code, enabling DeFi and the New Economic Infrastructure.
Which is an agreement to follow in the system. It is possible to create DeFi protocols that cannot be interfered with and manipulated. All the modifications (such as balance updates) appear on the blockchain and can be checked by everyone. Smart contracts in the DeFi application are mainly deployed to support the atomic (simultaneous and inseparable) transfer of two of an asset or as security in a non-custodial deposit.
The Current State of DeFi
This makes it possible for DeFi to circumvent the counterparty risk and facilitate an act of duplicating a wide range of financial services, with no intermediates or centralised platforms. This may cut down expenses and possibilities of errors. The few examples include lending markets, exchange protocols, financial derivatives as well as asset management protocols. Smart contracts may also refer to other smart contracts and avail of their services.
This idea that an operation be able to be carried out on multiple smart contracts as one transaction is also referred to as the transaction composability, and can be used as an effective means to reduce risk of the counterparty defaulting in their end of the agreement. Most of the benefits attributed to DeFi, or blockchains, in general, can also be derived on a centralized infrastructure.
Core Components of the DeFi Ecosystem
Decentralized systems are not the only place of Smart contracts. Indeed, centralized ledgers can be applied on the same standards and execution frameworks. The use of the Ethereum (a virtual machine that is compatible with all computers in the blockchain network, executing smart contracts) in combination with highly centralized consensus protocols has a large number of examples. Likewise, centralized platforms can use the same financial benchmarks and procedures of the token. In those systems, even composability can operate. Besides, properly handled centralized solutions.
But there is a common assumption underlying centralized systems: we have to trust intermediate actors and institutions which are mainly not transparent. However, it should not assume that. The history knows the examples of corruption and mistakes in institutions. Nevertheless, when discussing the concept of financial infrastructure and contrasting the characteristics of the public blockchain to the centralized ledger.
Economic Disruption Potential
The economists can hardly begin with the note that the centralized parties are benevolent, and this fact overshadows the benefits of decentralization. Blockchain is visible to everyone. They may also offer an immutable, independent, and neutral infrastructure of financial transactions since they are not governed by one actor. Code is carried and performed in open system. The data can all be accessed and verified. Transactions, empirical studies and even the measurement of risk may be undertaken in real-time by both the researcher as well as the authorities.
And what is the best there are no limits to the access. This connotes two things. This is particularly opposite to the registries where there are authorizations where standards are set by centralized organizations. The considerable level of centralization may interfere with the process of playing the universally accepted norms, and the rights to access and using the infrastructure will be effortlessly politicized. With this, the participants.
Conclusion
That feel that they do not stand to benefit will be discouraged to use the central infrastructure. The obstacles can be overcome by means of decentralized systems to prevent the issue of limited or lack of cooperation. Second, DeFi takes a tiered infrastructure (see SchAr, 2021). The fact that a ledger is decentralized is not the reason that everything we put into a ledger is decentralized too. It may be justified to limit access or even control to some tokens or financial protocols. Such restrictions are achievable at the level of smart contracts without keeping the entire infrastructure neutrality.
However, in the case the registry itself (settlement layer) had already been centralized, then it would never be plausible to decentralize any component that is included in it. Probably we will also go boldly towards ledgers integrating payments, tokenized assets and financial protocols, including exchanges and lending markets. DeFi is the initial tendency of such evolution, yet the centralized infrastructures will develop along the same lines. The composability between transactions cannot be logically achieved unless the financial assets and protocols are within the same ledger.
