What is DeFiChain?
DeFiChain views the cryptocurrency industry from a simple perspective: people should have control over their finances. The current system, however, does not provide financial services that are truly controlled by their users. Therefore, DeFiChain's goal is to make decentralized financial services seamlessly accessible to everyone within the bitcoin ecosystem.
DefChain was created by the DeFiChain Foundation. The system, however, is currently so decentralized that it struck off the foundation in June 2021 and is now entirely controlled by Masternodes. Masternodes are essentially people who secure the network and verify transactions.
DeFiChain is an open source platform, allowing anybody to create their own projects in a truly decentralized way. There are even ways to get funding and support from the community. There will be more on that later in the article.
To understand what DeFiChain actually is, let's take a look at what makes it so unique. But firstly, we need to understand what DeFi is and how it works.
What is DeFi?
As the name implies, DeFi is a term used to describe a variety of financial applications in cryptocurrency or blockchain geared toward disrupting financial intermediaries.
The technology behind DeFi is inspired by blockchain – the technology behind bitcoin – which allows multiple parties to maintain a copy of a history of transactions, preventing a centralized authority from controlling it. This is important because centralized systems and human gatekeepers can impede the speed and sophistication of transactions while offering users less direct control over their finances. A key distinguishing feature of DeFi is that it extends the use of blockchain beyond simple value transfers to more complex financial transactions.
In order words, the idea of DeFi is simply to put the traditional financial system – such as banks or any other financial intermediary – on the blockchain. Here are two classic examples:
- By using the blockchain, you can get a loan from your home instead of going to a bank.
- Users can conduct trades online by taking advantage of decentralized exchanges without the involvement of a third party. Until the introduction of DeFi, only those who held and sold cryptocurrencies at the right time could make profits. With the advent of more sophisticated DeFi applications, this will change, opening up a wealth of new earning opportunities for everyone.
The security mechanism
Since DeFiChain itself is a hard fork of Bitcoin, much of its programming code is similar to Bitcoin's. Both Bitcoin and DeFiChain are non-Turing complete blockchains. Although this term may seem complicated at first, it is fairly easy to understand. In general, there are Turing complete and non-Turing complete blockchains.
Turing complete blockchains allow you to program almost anything you want on the blockchain. Ethereum is probably the most well-known Turing complete blockchain at the moment. It may be desirable for Turing-complete blockchains to be open and flexible, but they are prone to errors and malicious attacks, making them less effective. We have seen this occur more than once before, when Ethereum based applications have been hacked and millions of dollars have been stolen.
On the other hand, non-Turing complete blockchains, such as DeFiChain, provide fewer programming possibilities, but they also provide a smaller attack surface. This prevents arbitrary code from running on non-Turing complete blockchains. As a result, only “predefined” code can be executed. DeFiChain, however, does not consider this a drawback, but rather an important design feature, because financial products require a high level of security that can only be achieved by a non-Turing complete architecture.
DeFiChain is not only a hard fork of bitcoin with a non-Turing complete function set, but it is also periodically anchoring on the bitcoin blockchain. Every few blocks, a specific data set from the DeFiChain blockchain is stored on the bitcoin blockchain. In this regard, it is important to note that:
- In the event of a 51 percent attack, which means that someone holds more than 50 percent of the coins, the blockchain can only be reverted to the point at which the last anchoring occurred.
- In addition, this also implies that a 50 percent attack is fairly unattractive from an economic standpoint, meaning that the DeFiChain is relatively secure despite its young age.
Proof-of-Stake consensus mechanism
Due to its slow transaction speed and high transaction costs, Bitcoin's scalability is quite limited. Thus, DeFiChain chose the proof-of-stake consensus mechanism over Bitcoin's proof-of-work. In principle, proof-of-stake entails that transactions are verified not by hash power but by the number of people holding the coins - the stakers.
Three benefits result from this:
- As a first advantage, transactions on DeFiChain are significantly cheaper and execute much faster than on the bitcoin blockchain.
- Second, proof-of-stake makes it much easier to decentralize a new project. As opposed to the complex distribution of computing power in the case of proof-of-work blockchains, the distribution of coins, is a fairly easy and fast process.
- The third advantage of proof-of-stake is staking. The idea behind staking is not to buy expensive mining equipment, but to use coins – in this case DFI – to verify transactions and to protect the network. In exchange for this service, stakers receive rewards from the blockchain, which are currently around 40 percent.
Like Bitcoin, DeFiChain has a maximum supply of coins. The maximum number of Bitcoins that will be ever in circulation is 21 million, while the number of DeFiChain coins is 1.2 billion. Around half of those coins have already been distributed, and the rest should follow around five to seven years. Essentially, this means that there is currently a high inflation, but on the other hand, it also means that staking is extremely profitable right now. More stats of DeFiChain can be found here.
The DeFiChain community
The DeFiChain Community is very active and constructive, primarily on the subreddit /r/defichainblockchain. Users in this subreddit discuss critical issues, propose improvements, or simply initiate leisure discussions.
These discussions often result in improvement proposals (DFIPs or DeFiChain Improvement Proposals) or requests for community funding (CFPs or Community Fund Proposals).
The community is also very active on the following channels:
How do DFIPs and CFPs work?
Any person can submit an improvement proposal (DFIP) or a funding request (CFP) by paying a fee of 50, respectively 10 DFI. A DFIP is a proposal to modify an integral part of the blockchain or its mechanism, whereas a CFP is a proposal for funding an individual project that benefit the community and the whole DeFiChain ecosystem.
During one of the monthly voting rounds, masternodes evaluate each proposal and approve or reject it. Submissions must meet strict deadlines; in extreme cases, the core team may also call for an emergency vote.
DeFiChain is designed specifically for decentralized finance (DeFi) applications. Contrary to Ethereum blockchain, which allows for the programming of games and the distribution of NFTs, DeFiChain does not permit this. Its function set is limited by design.
The phrase "a jack of all trades is a master of none" underscores DeFiChain's decision to focus exclusively on DeFi applications instead of being an all-rounder. But let's take a look at which DeFi applications are now supported by DeFiChain:
- Decentralized assets: Users may take out dToken loans in the form of dTokens (e.g. dTSLA, dGOOGL or dCOIN) by creating vaults and depositing crypto as collateral with a minimum collateralization ratio of at least 150% (at least 50% has to be in DeFiChain's native coin DFI or DeFiChain's stablecoin DUSD).
- Tokenization of assets: This is undoubtedly one of its most interesting features. Initially launched in 2021, it expanded in 2022 with futures and will continue to grow with options and other advanced financial instruments. It has been made possible through so-called dTokens, tokenized versions of actual assets (e.g. dTSLA, dGOOGL, dCOIN), which currently can be bought and minted on the DeFiChain blockchain.
- Wrapped tokens: For DeFiChain tokens to be interoperable with various other networks (such as the ERC-20 network), they must be 'wrapped', which allows them to be transferred to non-native DeFiChain networks while still remaining closely tied to their native version's price.
- Decentralized oracles: One of the main issues with pricing assets in decentralized systems is precisely dictated by the lack of centralized entities determining their value. A decentralized oracle can help solve this problem by bringing real-life data onto the blockchain. A smart contract, which consists of software code that executes itself, uses this information to perform various functions.
- The DEX (Decentralized Exchange): The DEX is the place where users can exchange DFI for other coins and dTokens. As there is no order book architecture on decentralized exchanges, liquidity pools on blockchains are needed to facilitate trades.
- Liquidity mining: Closely related to the liquidity pool concept is liquidity mining (LM). Liquidity mining is the process in which crypto holders lend assets to a decentralized exchange in return for rewards. These rewards commonly stem from trading fees that are accrued from traders swapping tokens and from rewards, distributed directly from the blockchain.
The following functions will be available in the future:
- Decentralized lending
- Transferable debts and receivables
- Decentralized non collateralized debt, based on reputation and other factors
- Distribution of dividend