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 her account on the Coinbase centralized infrastructure. Coinbase acts as the intermediary between Sarah and the blockchain.
2. Sofia sends money to Sarah through her Coinbase app, and the Coinbase node creates a transaction block.
3. The block is then distributed across the blockchain network.
4. Each node in the Coinbase blockchain network verifies the block is valid using 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 record of ownership of the money received from Sofia.

Trouble is Brewing for the Status Quo

The financial world could be decentralized, and banks and intermediaries could be obsolete if everyone who wanted to exchange currency created their own node and interacted directly with the blockchain.

Blockchain has some downsides that need to be ironed out before it's taken globally. But I'll state it clearly, not as many downsides as the current institutionalized system has today. Some of the challenges are:

• Bugs or exploits can be introduced in the codebase.
• Governments don't know how to regulate DeFi projects.
• Cryptocurrencies are highly volatile and need to stabilize before expanding.
• Scalability may make transactions expensive.
• Users have no backup if they make mistakes or lose their node.

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.

I suspect they'll choose option number one, and we'll watch them die on their centralized vine.