Decentralized Finance, a new and safer system

[shukla7789]

The execution of smart contracts is a drop in the financial ocean, but in the future it will have the potential to become something much more significant. This is the new era of decentralized finance.

A case study
For a moment, let's imagine that we own a small real estate agency in the United States with insufficient capital for a few high-potential/high-value deals that would allow us to grow as a company in this field.

Traditionally, we could resort to loans to raise capital. However, although japan whatsapp number database may be a good deal and with a low risk from a banking perspective, for relatively large investments in relation to the financial size of a small company, it becomes difficult – or even impossible – to obtain the necessary financing due to the criteria underlying these loans.

Now, let us imagine that we are a real estate investor in Portugal with capital to invest and that we would even be interested in diversifying our real estate investment portfolio to other countries. There are several obstacles to taking this step, including bureaucracy, logistics, culture, and law, among others, which can make this type of business, which may initially seem attractive, into a business with unattractive or even impossible returns.

Blockchain and Smart Contracts: The Influence on Decentralized Finance
These two imaginary situations currently coexist, and it is now possible to use technologies based on blockchain and the execution of smart contracts to bring these two realities together and remove the points of friction for both parties.

The real estate agency manages the procedures and bureaucracy in its country of origin, where it is used to dealing with real estate issues. Then, by ensuring the conversion of the money paid, for example, by a tenant into cryptocurrencies, it can use a code ( smart contracts ) that enables the raising of financing in a fractional manner and that also guarantees the equitable distribution of income when a future transaction of the property is made to another buyer or, in the case of a rental, the equitable distribution of the monthly amount among all owners of the fractions in the correct proportions.

Additionally, as investors we can at any time "sell" our fractions to a third party without having to justify or notify.

In this completely decentralized way and with the least possible friction, platforms like Real.co are beginning to emerge that bring together and respond to the problems of the parties involved.

While it is true that in this and other blockchain- based projects there are still many "loose ends" that represent serious problems and still have no answers in sight, the truth is that these prototypes in production are beginning to demonstrate the possible potential of decentralized finance . The conditions are created for the emergence of new business opportunities that were previously inaccessible or completely unrealizable, thus adding value to an entire "new" economy.

Centralized vs Decentralized Exchanges
One of the most interesting disputes in 2020 took place at the level of cryptocurrency "exchange houses". 2020 was the year in which DEXs gained new prominence with a daily transaction volume reaching 500 million dollars.

Unlike CEXs, DEXs rely on the execution of smart contracts to carry out transactions . This code is public and anyone interested can audit, validate and, if they wish, trigger the execution process of smart contracts from their own computer. The major obstacle to greater adoption lies in the limits and lack of scalability of the Etherum (ETH) network, on which they are based. During peak network usage, this entails very significant costs per transaction, which can make the currency transaction business unprofitable.

Ethereum Network
Currently, one of the pillars of the decentralized economy is based on the Ethereum network , which was the first to contemplate the execution of smart contracts in an accessible format. However, the network is based on algorithms (POW) that make the execution of these same contracts expensive and slow in times of network overload. In essence and in an abstract way, there is a serious scalability problem in the network.

After years of development and significant delays, the deployment of version 2.0 is finally starting to take shape with the completion of the first milestone in early December, out of a total of six planned by mid-2022.

This new version will significantly increase the scalability of the network, resulting in faster and more efficient execution of smart contracts and, consequently, a significant reduction in the cost of executing them. Initially and after the arrival of version 2.0, what is currently a drop in the financial ocean will be able to become something much more significant.

Non-fungible tokens (NFTs)
These are digital artefacts that have their own characteristics, being characterised by being unique, indivisible and possibly rare. For example, we cannot send/sell part of a concert ticket, because that ticket is unique and indivisible, whereas a concert ticket may or may not be rare.

In the case of rare "NFTs", we can draw a parallel with deeds of real land/houses in which the title of property "ownership" is associated with a unique and digital record. In this way, this digital record has a value associated with the value given to the characteristics of that same material asset.