Decentralised finance step by step

Decentralised finance

We are starting a new section of the blog where we want to address all those people who are interested in learning about decentralised finance, the world of cryptocurrencies and blockchain from scratch.

Luís Fernández, our CEO, wants to contribute and share his vision to serve as information. Of course, you should not take this as financial advice. Rather, we try to facilitate the understanding of how each project, tools and protocols that can be found in the different blockchains work.

Let’s start by reviewing the basic concepts, summarising the meaning of each one of them. They are words that you may hear almost every day; but even if they are familiar to us, there are still details that we do not know.

Blockchain

Some people also call them networks or blockchains, but in short they are a large database where each project stores information. Is that all? Of course not. Databases already existed before we knew the concept of blockchain. We can say that a blockchain is a special kind of database; in these databases, transactions (sending tangible and intangible assets*) are not controlled by a single party. The entire transaction history recorded in such a ledger is decentralised and distributed.

What does decentralised and distributed mean?

Broadly speaking, it means that blockchain participants have access to this distributed ledger and immutable record of transactions. In this shared ledger, transactions are recorded only once. None of the participants can modify or falsify a transaction once it has been recorded in the shared ledger. In case an error occurs while recording a transaction; a new transaction will have to be added to reverse the error. Both transactions will be visible on that blockchain ledger.

Types of networks

Types of networks

When we talk about a decentralised system, we mean that there is no single decision point. Each node in that network can make the decisions that suit it best according to the consensus rules that the operator of that node has freely chosen. The end result of the system as a whole is the collective response. Each node in a decentralised system does not know the state of the whole system; they simply make the decisions that best suit them with the information they possess.

Blockchain 2.0 for decentralised finance

Continuous innovations in blockchain technology resulted in the birth of the Ethereum platform. Like Bitcoin, it is also a distributed and decentralised network.

Bitcoin can be said to be digital money. What Ethereum did is to launch a decentralised platform to program those assets, that digital money. While Bitcoin is a cryptocurrency widely used for trading, Ethereum is a multipurpose option that also has its own cryptocurrency (ETH).

Ethereum is a public blockchain, i.e. open source. Where decentralised applications can be built that can be used by everyone. Before Ethereum appeared, blockchain applications could only perform a very limited set of operations.

The first cryptocurrencies, following Bitcoin, were created exclusively as digital currencies, peer-to-peer assets that people could exchange, send, receive. Vitálik Buterin, the person who created Ethereum, also used similar designs and protocols to Bitcoin. But he redesigned them to be able to support applications, not just for issuing currencies, but for many other functions.

Smart contracts

A smart contract is a coded program that executes automatically. That is, they are capable of performing the administration, performance and payment of a series of clauses that give rise to it. It can be compared to a physical contract but designed with self-executing code.

These smart contracts are used to build all kinds of applications that are called DApps. Software solutions, programs or code that operate on a blockchain. They allow interaction without any intermediary between end users and their suppliers.

One of the objectives is to decentralise existing services using the blockchain. This offers an immediate benefit, reducing costs and fees for any type of transaction. People can connect directly without the need for an intermediary. This guarantees transparency, immutability and security of transactions.

dapps blockchain

Services that DApps can cover

  • Finance
  • Real estate
  • Streaming platforms
  • Insurance companies
  • Governance
  • Distribution
  • Healthcare
  • Gaming

Summarising decentralised finance

In this short guide we have tried to explain 3 basic concepts related to the decentralised finance ecosystem. The theory may be a bit boring, but it is important to assimilate the meaning of some of these concepts and others that we will touch on in the next articles.

For the next article we will talk about the possibilities offered by these ecosystems. We will analyse the offers of different projects and the tools with which we can already interact.

Of course, we will also emphasise and analyse the risks and alerts that may be involved for users when interacting with different protocols and assets.

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