Blockchain: How Nodes Enable DeFi Networks

Have you heard the term DeFi?

It stands for Decentralized Finance and is the financial ecosystem that uses blockchain technology, smart contracts, and decentralized networks to provide financial services.

You're probably already familiar with the most common decentralized financial implementation, cryptocurrency. You may even own some Bitcoin and Dogecoin, but it also enables NFTs and was the foundation of the notoriously defunct exchange token FTX.

What is special about DeFi and blockchain, and why is it shaking up the financial industry?

Simply put, blockchain technology eliminates the need for intermediaries like banks and other financial institutions. In a decentralized model, financial transactions use their network of nodes to secure and validate the transaction. There isn't a need for a central node (bank) to act as a gatekeeper for transactions.

Here's how it works:

1. Sofia downloads a crypto exchange app (Coinbase) and sets up an account on the Coinbase centralized infrastructure.
2. Sofia decides to send money to Sarah through her Coinbase app. When she sends it, the Coinbase node creates a transaction block.
3. Coinbase acts as the intermediary between Sarah and Sofia using the blockchain. The block is distributed across the blockchain network.
4. Each node in the Coinbase blockchain network verifies the block by the block's unique data elements:
• Block Header
• Previous Hash
• Merkle Root
• Timestamp
• Difficulty Target
• Nonce
5. Once verified, it's added to the chain and reconciled across the network.
6. Sarah receives the money and Sofia's account his deducted the amount of the transaction.

Trouble is trickling into the Financial Market

Blockchain is a looming disrupter to the current financial market. It's trickling in and slowly decentralizing banks and intermediaries making them obsolete. If everyone exchanging currency created their own node and interacted directly with the blockchain the current financial market would crash and burn. Existing monsters in the financial market are fighting the expansion, but as it always, they will eventually lose to a new way of doing things.

But trust me, blockchain isn't perfect, it has some downsides that need to be ironed out before it takes over the global financial market. Although I'll state it clearly, not as many downsides as the current institutionalized system we are living in today. Some of the real challenges that are stifling blockchain adoption are:

• Bugs or exploits can be introduced in the codebase.
• Governments don't know how to regulate DeFi projects.
• Cryptocurrencies are highly volatile and users are waiting for stabilization.
• Scalability may make transactions expensive.
• Users have no way of recovering their investment if their transaction is lost or their node is disconnected.

How are the financial giants going to respond?

The financial industry has two choices as the blockchain technology gains traction: 1) shrink as the population moves to blockchain platforms and eventually become obsolete, or 2) join in the blockchain game and create new technologies to manage money. Remember when movies moved to streaming? Will they be Blockbuster (you probably don't remember who they are) or Netflix?

I'm guessing they'll choose the Blockbuster option, and we'll watch them die on their centralized vine.