DeFi Defined

Aug 16, 2020

DeFi is shortform for the term "Decentralized Finance". To the uneducated that's never heard of Google, it's just two oblique words rammed together to generate a buzzword that you might expect to melt off into the sunset like so many buzzwords have.

Not this one.

To try to make sense of this for you, I'm actually going to start at the finish line.

The year is 2080. Our hero, Simon, has been working hard expanding his business network, running many AIs (Artificial Intelligence) to keep it all together, and to make sure his clients never have to wait for service. Simon is a purveyor of exotic AI-designed homes, which he sells via the countless smart contract decentralized realtors. A typical sale goes like this:

  1. A potential customer, Lucy, searches the popular architect blockchains, looking for an architect with an established blockchain reputation. Simon has created some really intelligent architecture AI, so his home designs are super-popular, and it shows with his lofty blockchain-verified reputation.

  2. Lucy's AI autofills her desired home-design parameters and scans Simon's inventory, locating the closest match. One short live-streamed mini-drone interactive VR home tour later, and it's a perfect fit! A button appears with the word 'Buy' on it. It gets pressed. Lucy's AI has to now round up $58 million dollars worth of liquid assets. Start your watches..

  3. Lucy's AI tracks down all of her assets. First step, refinance her current home. bloop blip. 634 blockchain legal documents auto-signed. $38 million in possession.

  4. Next, Lucy's AI understands that she does not want to liquidate her crypto holdings not only to avoid missing out on the long overdue bull run since the great crypto crash of 2077 (which made the great crypto crash of 2072 seem like child's play), but she doesn't want to trigger the real-time capital gains tax liabilities, so her AI decides to instead puts $30 million worth of crypto into collateral for a loan of $10 million in CBDCs at 1.5% APR. Still need a further $10 million though.

  5. Lucy's AI enters the banking loans blockchain, but despite that the rates are low, the banks' AIs statistically determine that Lucy's risk profile is too high, so they can only offer $5 million against her current asset inventory, which is just ridiculous, but when have banks ever not been ridiculous. Her AI completes 238 legal blockchain documents to seal the deal.

  6. Lucy's AI enters the hard-money lenders blockchain, and even though the rates are exorbitant, her AI finds a lender ready to close the gap of the final $5 million. 147 more legal documents completed on the blockchain and the deal is done.

  7. Both Simon's AI and Lucy's AI collaborate to complete the Title search, document filings, disclosures, fees, utility transfers, prorated taxes, digital keys, etc.

  8. Click! Stopwatch says, 1 minute, 15 seconds. Lucy is now the full owner of one of Simon's beautiful homes.

Wow, could you even imagine such a world?? I mean, these days, anybody that has ever bought a house knows the months and months of legal bullshit and paperwork, and paying the salary of every goddam agent, banker, lawyer, title company, insurer, broker, inspector, property association dues, taxes, escrows, fees, etc. etc. etc. It's the most painful money-grubber-infused paradigm ever created. Everyone imaginable takes their share of it, and they've all created such unnecessarily complicated Rube Goldberg rent-seeking horseshit such that it's nearly impossible to navigate without implicitly trusting a realtor to point at what to sign and throw money at next.

Real estate, and many other kinds of markets, are ridiculously hyper-complex because these fucking middlemen make it so. Why the hell should it be any different than buying a bicycle? I'll tell you why, because there's a lot of money involved, and wherever there's tons of money, count on these middlemen parasites to screw with the process so they can squeeze their grubby little paws in there and take a handful of your cash.

Now imagine you could put them all out of work and get them out of your fucking pockets..

That my friends, is but one of the many promises of DeFi, elimination of all these bastard parasite middlemen that can be replaced with a little bit of software. And real estate is just a single example of thousands of middleman rent-seeking industries that can be digitized or completely obliterated: like centralized stock exchanges, accountants, a good chunk of lawyer shit, voting, cross-border payments (wink), incorporating, patents, welfare, chain-of-custody, reputation, lending, education, taxation, and on and on and on..

Don't get me wrong, I'm not anxious to make these middlemen suffer much, we couldn't have gotten to where we are today without them, well mostly, well somewhat, but the future points to a world where there won't be much room for human beings in the value pipelines. And before you goddam bleeding hearts (I hate you people) start ripping my ass for condoning putting these people out of work, just remember all the horse-and-buggy drivers you put out of a job every time you get in your car. Technological evolution always amounts to deprecating vocations. Deal with it.

So that's the end game, but how do we get there? Let's look at where we are now. We have a bunch of cryptocurrencies, which by themselves create the value substrate for decentralized finance, but crypto alone obviously won't get us there, but what WILL get us there are..

Smart Contracts

These are the little blocks of code I was referring to earlier. The name is kind of a misnomer though, because it misleads people into a false sense of trust. I really don't like much of the half-assed terminology people come up with to apply to all this new tech. I mean, a smart contract is only as smart as the person who wrote it. And if Ethereum has taught us anything, it's that there's a lot of dumb smart-contract authors leaving gaping holes in the software that suffer massive hacks costing hundreds of millions of dollars. Really, They should just be called Process Contracts, that's all they do is process things, but as usual, nobody calls me to get my input on these decisions, so y'all are stuck with these stupid and misleading naming conventions.

Taking Ethereum for example: A smart (my ass) contract is nothing more than someone's program that takes inputs from whoever or whatever is calling it, processes that information according to the software logic that the author created, and then sets the outputs to either be stored on the blockchain or just returned to the caller. That's literally it.

This 'code' is stored right on the Ethereum blockchain, so it takes up a lot of space, and hence the Ethereum blockchain is bloated and the gas to do anything is exorbitant. It doesn't scale very well and quite often the gas fees are so high that many of the use cases for smart contracts are eliminated. Sure, they're trying to get sharding in place, but it will be a long time before this problem is reliably solved on the Ethereum blockchain.

Understandably, at first glance, it may not seem like these small little blocks of code could do much does it? But if you think about it, every single thing that all of these industries with middlemen do for us, essentially boils down to a series of exactly these same steps: take in data, process, and output results. It shouldn't be too hard to imagine that if you were to watch what most middlemen actually do, it can be broken down into processes that can be fully automated!

Most middlemen don't create or think, they just have a system that they keep repeating over and over while we pay a fortune for them to do it for us. Wouldn't it be so nice to just have a smart contract perform the same functions anonymously, instantly, for a pittance of cost??

Attrition

There are many thousands of smart contracts on Ethereum, each designed for specific needs of the author and possibly their customers. Smart contracts have been the wildest of wild success stories, with countless example of everything from frivolous Kitty programs right up to the magic of the Uniswap DEX (decentralized exchange). And we're just at the starting line. Soon enough, major industries will be moved into smart contracts, setting off the greatest displacement of human administrative work in history, by far. This isn't to say that all smart contracts are implicitly DeFi, because smart contracts can do plenty of stuff that has nothing to do with finance, but you can be pretty sure that virtually all DeFi requires some form of smart contracts.

As a whole, smart contracts are going to permeate into all industries, viral-like, ceaselessly, flipping centuries of established processes upside down and mostly into the dumpster. This really is the beginning of the greatest epoch of human evolution, where we finally have the technology to effortlessly upset our primordial archaic rent-seeking hierarchy that has held a gun to our heads forever.

It will be a long process but make no mistake, the incumbents are scared, and they will lie, cheat, do whatever it takes to illegitimize, downplay, oppress, contain, own, or mock this tech, but it won't matter in the end. Giving people options to save a considerable amount on fees and to reduce risk, will be the ultimate decider of the last man, er contract standing.

Bit of a tangent. DeFi is not a project or a platform, it's just a category of smart contract software with no real specific definition other than the software handles money in a trustless manner. Do NOT assume that because a project or platform labels itself as DeFi that it's automatically something to blindly pour your money into. DeFi projects require exactly the same scrutiny as any other crypto project, for it's just as easy to make a DeFi scam as a token scam. Be smart, educate yourself on any project that claims to be DeFi. I'm not going to discuss specific DeFi projects here. As always DYOR.

I also mentioned there would be other benefits from DeFi. These would be as hard to anticipate/predict, just like the Internet today would've been difficult to predict from 30 years ago. Innovation in such a rich paradigm with programmatic ability to manage value, has limitless potential, and the new concepts that will manifest as we move forward will be unlike anything we've ever seen, mostly because these concepts could never have existed without this technology.

Flare

This is the best thing to happen to XRP....ever.

I repeat.

This is the best thing to happen to XRP.... E V E R.

What is it? Ok, in a nutshell, Flare is a new blockchain (development supported by Ripple's Xpring by the way). It's different than Ethereum, but has a lot of similarities. It has its own native coin, Spark (just like the XRPL has XRP as its native coin). The Flare blockchain is premised on the same EVM (Ethereum Virtual machine) as the Ethereum blockchain, which essentially means that a lot of the same capabilities that Ethereum has, will also be possible on Flare.

Why is this so important to XRP?

Because up to this point, it required specialized centralized proprietary development to automate XRP transactions; not very reflective of the crypto ethos at all. By integrating XRP into Flare, now there's an established decentralized very matured development platform that can UNLOCK all of XRP's DeFi potential, allowing for rapid mechanical XRP adoption as not only can people use XRP, but now machines can too. Machines will use XRP in exponentiating volumes, unlocking all of XRP's untapped value, far outpacing any direct human use cases, and that should excite you.

What happened to Codius? Wasn't that supposed to be the processing layer for XRP?

Yes, it was, but either lack of interest from the core developers, or just Codius' shortcomings, like its setup/configuration complexity, or centralization, etc., just couldn't seem to get it out the door in a meaningful timeframe, and now sits largely idle in terms of development. It may rear its head in the future again, who knows, but the one-trick-pony that made Codius so important was the idea that it could safely store secrets, which are needed to access XRP balances trustlessly.

However, Flare has a clever mechanism for eliminating the need for the blockchain to need to store secrets, by offloading that duty to its agents that have staked money, so it's not in the agents' interest to have XRP go missing that's under their management. Thus, if Flare can effectively work with all other blockchains without the need to support secrets, then what has Codius really got to offer?

Why isn't Ethereum good for XRP but Flare is?

Ethereum can't do anything with XRP, or any other blockchain for that matter. Ethereum can only work with ETH or ERC-20 tokens that are already on the blockchain. In fact, the Uniswap DEX on Ethereum doesn't offer XRP or other non-Ethereum coins because of its lack of interoperability with other blockchains.

The lack of interoperability between blockchains is a significant current DeFi shortcoming that many projects (hyperledger, ILP, Link) are attempting to solve, not always in a trustless manner either, but it's been proving exceptionally difficult to hit the sweet spot of decentralized, anonymous, trustless, real-time, programmable, and truly agnostic. There are some potentially promising solutions out there, but Flare's architecture in particular, has a clever solution that I really like, and works with any blockchain.

I'm not going to to get into gory details too much because you can read the whitepapers (1)(2) yourself if you can handle the information density, but essentially, Flare incentivizes 'agents' to stake a bunch of Spark on the Flare blockchain, and now they're allowed to receive XRP from people that are looking to get its 'twin' FXRP minted on the Flare blockchain. Put simply, you would collateralize your XRP on the XRP ledger to get FXRP on the Flare blockchain. When you want to convert back to XRP, you simply send your FXRP to the agent's Flare address, and he then sends you XRP from his XRP holdings on the XRP ledger. The agent is the 'only' link between the blockchains. Flare itself can't see the XRPL, and vice versa.

The reason the whole process of exchanging XRP/FXRP back and forth is trustless, is because the agent has staked lots of Spark, far more than the amount he can hold in XRP. If he misbehaves, you just automatically get the appropriate amount of Spark from his stake. You can't lose money.

What this all adds up to is the marriage of Ethereum's programmability for smart contracts, with the power and glory of the XRP Ledger formula-one crypto rocket. You see, the problem with the original Ethereum blockchain is that the smart contracts and crypto live on the same blockchain, massively increasing the resource demands on miners and wallet holders, and necessarily producing massive globs of expensive blockchain-congesting data, for which only a small fraction would actually be for value transfer.

By having XRP and Flare in two separate blockchains, you not only avoid encumbering XRP's ass-kicking value-transfer performance, but at no ledger performance penalty whatsoever you now also get a Turing-complete (meaning robust programming language) very mature Smart Contracts layer with FULL and TRUSTLESS XRP ledger interoperability! It's an amazing combination that will lay some serious smack down all over Ethereum's fat expensive low-throughput ass.

But wait, there's more..

Don't let me give the impression that Flare is faithfully married to XRP. No, like a spoiled gold-digger wife, XRP doesn't even know Flare exists, just takes his money. Flare, well, he's not exactly the commitment type either, and so it won't be long before some other floozy is in the picture. Could it be ETH getting dressed up as FETH? Or how about that Bitcoin whore showing up as FBTC? And don't forget about every single ERC-20 token in existence.

Yes, it's possible and quite likely that every coin out there will be joining the Flare orgy. I know, I know, how can this possibly help XRP if XRP is no longer special.. It's because this is creating yet another 'level playing field' and it's only in level-playing-fields that winners can be determined, and the value from losers be taken. Other than exchanges, there really aren't a lot of products that allow you to trustlessly and anonymously commingle different cryptos, particularly in smart contracts. Flare promises to be the cross-blockchain-focused smart contracts paradigm that will finally allow all the cryptos to 'compete' head-to-head, in a utility context.

In other words, the only thing better than incorporating smart contract functionality so only XRP benefits, is to allow all coins to benefit from smart contracts, IN THE SAME ARENA, putting them within XRP's reach so XRP can finally showcase its vastly superior tech (during FXRP/XRP conversions) and bash the competition's heads in. It may be a tad biased how I spun that but that doesn't make it any less true.

And if you order now, you also get...

Flare's ability to trustlessly host all cross-blockchain coins, and bring them into the same matured programming environment, naturally leads to one ultimate and very important manifestation, a truly cross-blockchain DEX, very similar in concept to Ethereum's Uniswap, but instead of just trading Ethereum-based coins, this means you can trade literally any coin in existence, for any other coin in existence!

And like Uniswap, you could do all of this anonymously (no KYC/AML), without limits, without typical CEX (centralized exchange) downtimes, without CEX hacking risks, without risk of govt seizure, probably without taxes if you do it right, etc.. I expect if this DEX manifests on Flare, it will be very very popular, and may put a serious dent in the CEX industry (giggle). The beautiful thing is, the Uniswap code should easily port from the Ethereum blockchain, hopefully with little modification.

Having this DEX on Flare also opens a whole paradigm of smart contract automatic 'trading'. An example might be a payments app that person A uses Bitcoin to send money to person B who wants XRP. The smart contract could just simply use the DEX to perform an inline conversion. Easy peezy.

But that's not all.. You'll also get...

Remember David's proposal to modify the XRP Ledger so that it can support XRP-backed stablecoins? Well, it'll be trivial for a developer to create this feature for FXRP on Flare. That's right, the stablecoin magic we've all been waiting for, will probably be coming on Flare.

Quicksand

I know this all sounds BORING as SHIT to most of you ADD hopium junkies just looking for that epic moonshot, but this is a truly revolutionary advancement for our beloved XRP, absolutely game-changing. Cross-chain smart contracts are the critical tools that until now were missing, but are required to realize the vision presented in my Simon architect example. If you thought the Internet changed the world, man, you have no fucking idea what the next 5 years, 10 years, couple decades, will bring.

Being 'early' doesn't even come close to describing how we've barely scratched the surface of the change that's coming, but finally, the tools are in place, the incumbents like PayPal, Visa, MasterCard, are starting to get in on the game, and the general masses are closer than ever to one-click entry into the crypto-verse. The budding industry-upsetters are busy as hell making the smart contract nukes that's going to forever destroy centralized finance as we know it, to truly free humankind from their hegemony, and all of this is soon coming at us at the speed of light, under the seemingly innocuous-enough umbrella term..

"DeFi"


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