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Learn How To Defi Part 2

Let’s continue learning Defi in part 2 and also reference my Notion page here. 

TL;DR

Here is the layout:

CeFi vs. DeFi 

How to determine Defi?

DeFI Infrastructure

Blockchain and Cryptocurrency

Before Bitcoin (Pre-2008)

Before Defi (Pre – 2013): Proof of Work (PoW) vs. Proof of Stake

Defi (2013 – Present)

CeFi vs. DeFi 

CeFi is permission, custodial, centralized trust and governance and requires real identity.

DeFi is permissionless, non-custodial, decentralized trust/trustless and governance, pseudonymous 

How to determine Defi?

To determine if it is Defi, ask 3 questions:

  • are the financial assets controlled by the user?
    • no → CeFi (Centralized Finance)
    • yes → move to the next question
  • can someone single-handily censor a transaction execution?
    • yes → CeFi Intermediary, DeFi Settlement (i.e. BlockFi)
    • no→ move to the next question
  • can someone single-handily censor the protocol execution?
    • yes → Centrally governed DeFi (i.e. Tether)
    • no → DeFi

DeFI Infrastructure

Blockchain and Cryptocurrency

Blockchain is DeFi’s backbone which makes DeFi decentralized.

Blockchain is a technology/software protocol to transfer digital information (no necessary money) among multiple parties under shared assumptions and data without trusting each other.

Before Bitcoin (Pre-2008)

The original PoW idea was to fight for Junk Mail through Denial-of-Service-Attack (DDoS) in 1993. But the term Proofs of Work was mentioned in the paper published in 1998.

One possible test run of the blockchain system before Bitcoin is HashCash that invented by Adam Back.

HashCash was eventually failed in 2004 due to a lack of financial feasibility to spend more than preventing spamming emails and waste a huge amount of CPU power after cycle 1,000 times.

Satoshi Nakamoto invented Bitcoin in 2008 through his Bitcoin White Paper that utilized PoW through its trustless and distributed consensus mechanism.

According to Satoshi Nakamoto himself, Bitcoin works only because its valuation has been increased enough to be worth mining for.

Before Ethereum (Pre – 2013): Proof of Work (PoW) vs. Proof of Stake

After Bitcoin was released, many argued that Proof of Work is not sustainable in the long term when the input of energy will eventually cost more than its own valuation to produce.

After the Bitcoin price collapsed in 2011, another pseudo-author Sunny King proposed a solution so-called Proof of Stake in 2012 and released its own token named PPCoin or PeerCoin. The author pointed out that the solution to a cryptocurrency long-term energy-efficient is to remove energy consumption dependency and replace it with Proof of History or even Proof of Excellence.

The following year of 2013, Sunny King proposed another solution for Bitcoin to transit from its Proof of Work into Proof of Stake called Primecoin. The key takeaway is that it will keep the Proof of Work mechanism through improvement on searching for prime numbers to complement the Proof of Stake design.

We all knew that both coins (Peercoin and Primecoin) were still existed today but less known in public. However, those ideas were borrowed by Ethereum and its future to move forward. Also, Proof of Stake may become a solution of sustainability for cryptocurrency in the future (source).

Ethereum/Defi (2013 – Present)

A key ingredient of DeFi is Ethereum’s smart contract platform that pushes beyond a simple payments network that Bitcoin was proposed in 2008 by Satoshi Nakamoto.

Ethereum introduced Smart Contract in 2013 and it is a code that allows users to trustlessly encode rules of any type of transition and create scare assets with specialized functionality. Of course, the smart contract goes beyond finance (here).

A bit of smart contract history, the idea came from Nick Szabo’s article in 1996 but he had an idea back in 1994 and created a Bit Gold in 1998. People widely believed he might be Satoshi Nakamoto and Bit Gold was the most closed form of Bitcoin which later widely successfully adopted and become a mainstream cryptocurrency.

Stay tuned for the next cheatsheet!

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