A future where DeFi and CBDC can work together

Decentralized finance (DeFi) is changing the way people around the world think about money, which is faster than any financial revolution in the past. Banks that have monopolized the way we obtain funds since ancient times are finally seeing their position challenged. Now, DeFi is beginning to provide an alternative solution that can reverse the economic landscape and democratize financing channels.

This tremendous shift in power from governments and banks to real people should have happened long ago, especially in developing countries where DeFi already exists. new As a tool for remittances and small loans.Inclusive finance is another important advantage DeFi can provide, especially when 1.7 billion adults Keep No bank account.

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The growth in the DeFi field is shocking. By absorbing concepts from traditional finance and transforming them into transparent agreements through smart contracts, DeFi provides a trustless ecosystem that can provide anything from insurance to loans to savings accounts.The attractiveness of DeFi is evident. The total value of assets held by DeFi financial products is close to Ingredients 175 billion US dollars.

However, with the rise of DeFi and the government and banks not wanting to lose control of the monetary system, they are turning their attention to issuing digital currencies on their own. Central Bank Digital Currency (CBDC) is seen as a way to maintain control of the currency system while providing users with faster and cheaper transactions. If we fast forward to 2030, what decentralized elements can we expect to see in our daily lives?

DeFi of the future

Imagine, if you want, that year is 2030. Célia, a young Parisian woman, took out her mobile phone and bought a Eurostar ticket from Paris to London. When she reached the payment screen, she chose her main digital wallet. Célia switched to her wallet and found that her digital euro balance had fallen. Nowadays, no one holds cash savings, because loans can be taken out and repaid in one’s wallet, depending on the value of any assets they own, and will be automatically repaid over time.

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Although DeFi will play a major role in 2030, so will CBDCs, which have become the default tools of global banks. China is in a leading position following the success of its previous trials. However, they tend to strengthen state control, censorship, and censorship. Therefore, DeFi has become the main way for individuals advocating freedom to choose and manage their finances, and it now supports the world financial system. Due to the prominence of DeFi, we have bid farewell to bank accounts, allowing us to access and use our funds anytime, anywhere, and borrow loans when needed.

Cryptocurrency aims to make currency universally available worldwide, which means that the underlying DeFi protocol provides liquidity for swaps and lending. Despite the complexity of DeFi, end users do not know that they are directly interacting with these global liquidity sources, because all DeFi and expenditures are fully protected by privacy.

Most importantly, we process all international payments on the second layer of zero-knowledge proof rollups (zk-Rollups), which is an extended solution that can bundle hundreds of off-chain transactions into Ethereum smart contracts, thereby Help reduce congestion on the blockchain. Generate a cryptographic proof called SNARK to ensure the validity proof and publish it on the first layer. Provide a free and open alternative to government funding, Bitcoin (Bitcoin), ether (Ethereum) And permissionless stablecoins can be directly used for any major government tokens.

Overcoming the challenges of DeFi

The development direction of DeFi is undoubtedly a reasonable future for it. However, in order for DeFi to achieve what many people think of as a utopian future, some obstacles need to be overcome first.

One aspect to consider is the barriers to widespread adoption. For example, the fragility of smart contracts, the unpredictability of the DeFi market, regulatory issues, and the availability of emerging technologies.

The other centers surrounding the space are too complicated for the average trader or investor. The inefficiency of the blockchain is a problem that needs to be solved, especially related to energy consumption and transaction costs on the first layer of the blockchain. Although the alternatives so far have compromised on security, early technical solutions are emerging. Examples of this include ZK-proof cryptography or second-layer solutions, which pack more transactions into the space, thereby reducing costs.

Of course, if you don’t talk about opponents, you have to mention some of the challenges of DeFi. For example, Dan Berkovitz, Commissioner of the Commodity Futures Trading Commission (CFTC), Think DeFi It’s a “bad idea”.Tom Mutton, head of financial technology at the Bank of England, once said Any CBDC will be “The efficiency of each transaction is ten times that of Bitcoin.” However, people have to question whether he realizes that the efficiency of zk-Rollups is already 1,000 times that of Bitcoin?

What measures is DeFi taking to overcome these obstacles?

Need more education. The DeFi Education Fund is an example of an organization trying to educate policy makers on the benefits of the DeFi ecosystem and help implement its regulatory framework. In order to improve the understanding of DeFi, it is funding applicants who are engaged in DeFi research and advocating legal research and DeFi practice. As the understanding of DeFi deepens, and as new users join, mainstream adoption will become easier.

related: Mass adoption of blockchain technology is possible, education is the key

Another way to expand the number of users is to improve the user experience. This has been seen in the second layer of the agreement, they are building wallets and infrastructure that support DeFi. By doing so, they eliminate friction and cost, and provide users with a better way to recover lost keys while reducing space complexity.

However, in the long run, the clarity of regulation will bring confidence to traditional investment service providers such as banks and institutions, and at the same time create a way for users to access DeFi in accordance with their terms in existing applications. The advantage of this is that many customers don’t even know that they are interacting with the blockchain behind the scenes, because all complex wallet interactions will be hidden. It is this kind of cooperation between traditional finance and decentralized finance that can promote the further expansion of DeFi to the mainstream.

related: DeFi: In a world without borders and managed by code, who, what and how is it regulated?

Act now

It is clear that DeFi will continue to exist and may become the core of finance in 2030. But to achieve this, more work needs to be done today.

At present, as more and more countries test them and governments begin to adopt them, the continuous development of CBDC poses a threat and opportunity to DeFi. However, just because CBDC is accelerating, it does not mean that DeFi will not be able to find its place in our future world.

However, if people want to control their money and know its source, while allowing developing countries to access banking, then DeFi is the way forward. The core elements of DeFi infrastructure, such as decentralized exchanges (DEX), lending agreements, exchange aggregators that automatically find the best price, and cross-chain bridges, if these government currencies want to become future interoperable and used as Completely digital currency.

Therefore, DeFi plays the role of an innovation laboratory, allowing testing of different infrastructure issues at extremely fast speeds and ensuring that the correct infrastructure required for CBDC is available when it is deployed globally. A CBDC that adapts to rapidly innovate using public blockchains and DeFi will benefit by connecting to a large liquidity pool, for example, allowing users to instantly exchange between digital euros and Ethereum, or using DeFi infrastructure to earn revenue digital pounds.

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A CBDC that is deliberately out of touch with DeFi will lose to private stablecoins, one of the fastest growing parts of the crypto industry. However, we do not need to rush to make it a contemporary reality. Before we see this mainstream adoption in our daily lives, DeFi needs to overcome many obstacles.

By 2030, our Paris friend Célia may not know or care about which part of her transaction is CBDC and DeFi, which should not matter to her. To achieve this goal, there is still a lot of work to be done. We hope that by 2030, Célia will be just one of the hundreds of millions of people who enjoy the bright highlands of the decentralized financial world, and this world will forever change the way we look at money.

This article does not contain investment advice or recommendations. Every investment and trading action involves risks, and readers should research on their own when making a decision.

The views, thoughts, and opinions expressed here are only those of the author, and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Will Habern He is the co-founder and CEO of DeversiFi, a second-tier DeFi trading platform supported by StarkWare’s scalable technology. Will has been involved in technical consulting projects, first at Cambridge Consultants, then IBM, then working full-time in the public blockchain field and joined Bitfinex in 2017. There, he led several projects, and then combined his experience with a passion for Ethereum, a permissionless innovation ecosystem to help spawn Ethfinex. Will is a member of the Melon Technical Committee-one of the first major governance experiments of blockchain-based protocols. He also holds a master’s degree in engineering from Cambridge University.