DeFi explained

Decentralized Finance (DeFi) is a phrase that is neither legal nor technical. Nonetheless, it is increasingly employed in talks concerning the future of finance and its regulation. Decentralization; distributed ledger technology (DLT) and blockchain; smart contracts, disintermediation; and open banking are examples of the common usage of DeFi.

While DLT and blockchain are used to underpin token-based ecosystems in decentralized systems like Bitcoin (BTC), they are not the only way to achieve decentralization. Furthermore, many distributed ledgers have a hierarchical, centralized governance model that restricts only those with authority. Decentralized, on the other hand, does not always imply scattered.

Disintermediation, too, is not a precondition for decentralization; rather, it may be a (side) result, given that the costs of centralized infrastructure will be difficult to recuperate in a world where services can be delivered on a distributed or decentralized basis.

This article will discuss the four roots of DeFi including artificial intelligence (AI), big data, cloud and DLT.

DeFi intelligence

Moore’s law, Kryder’s law and another pattern for which no label has yet been given are key technological growth patterns for the DeFi space. Moore’s law states that the amount of data processing capacity grows at an exponential rate. The same holds for data storage capacity, according to Kryder’s law.

The combination of ever-increasing processing power and data storage capacity results in ever-lower costs for both. The third reason that enables DeFi is the rapid expansion of communications capacity combined with lower prices. Increased network efficiency, which results in more bandwidth per dollar invested, supports the underlying assumption of bandwidth increase at lower costs.

Hardware virtualization is enabled by these three evolutionary patterns: software is hosted, updated and run on decentralized servers rather than on each workstation. Only data that has to be handled locally (in the case of an instant online connection and plenty of bandwidth) is likely to be processed locally.

Hardware virtualization enables the construction and implementation of service-oriented architecture (also known as “software as a service”), which is at the core of DeFi. Interestingly, Moore’s law, Kryder’s law and bandwidth expansion at falling costs all apply simultaneously, which imply that machine learning (ML) and other types of artificial intelligence (AI) will continue to advance.