deFi, finance or decentralised investment?
There are many ways of describing the development of decentralised investment platforms, with Ethereum, Bitcoin and other networks playing a leading role in recent years. There are many concepts related to the process of creating a decentralised investment platform, from tokens to blockchain technology, but don't worry, in this post we are going to tell you what each of them consists of.
If you are one of those who think that DeFi has its origins in the birth of cryptocurrencies, you are right, but the idea has gone much further.
what are decentralised investment platforms, how are they developed and what has been their evolution? Stay, because we have come to tell you about it.
Some basics before we start
Blockchain technology: it is a distributed database made up of a series of blocks that prevent the information contained in it from being modified once it has been published. This is possible thanks to peer-to-peer (P2P) networks. The blockchain can be private (limited to nodes) or public (there are no restrictions on reading the data).
Smart contract: a programmable and self-executing agreement that allows transactions of value under special conditions, e.g. a user can program a contract to send 20 euros when the cryptocurrency reaches a specific price, or when an exact period of time has elapsed.
Token: a digital asset or unit of value hosted on a blockchain that allows the owner to attribute it to a third party via the blockchain. Its value can contain several layers .
Ethereum: is a decentralised, open source platform that allows the creation of smart contracts using the Ether token, with which these contracts can be executed.
Cryptocurrency: a virtual currency or digital medium of exchange used on public blockchains, e.g. Ether or Bitcoin.
what is decentralised investment?
In a technical way, this concept stems from blockchain technology in order to eliminate intermediaries and allow people to control their finances directly with protocols built on smart contracts.
how does blockchain technology work in sending a transaction?
Let's suppose that you already have a digital wallet with Bitcoins and you are going to make a simple transaction with this currency to another user on the network. You both already have the corresponding software to access the Bitcoin blockchain, as well as the keys that will be used to sign and decrypt the messages sent. The system works as follows:
- You propose a transaction to the other nodes (sending Bitcoins from your account to someone else's).
- This message is received in encrypted form by the nodes that verify the sending of this proposal. If everything is correct, the nodes calculate the hash (specific element of each transaction) to identify this operation individually. It is unique.
- The verified transaction is included in a block, which in turn also contains the information of the last transactions of the previous block, the timestamp, the nonce value and the Merkle root value.
- The blockchain stores information immutably in blocks. After a certain period of time, this information can no longer be modified. The blocks are created by network nodes that participate in the process of writing data in exchange for a financial reward. The writing of that block is then reviewed by a miner and agreed upon by the other participants.
- For a block to be accepted, the miner must be the first to complete the Proof-of-Work (PoW) proof of work, which makes it more difficult for potential attackers to operate due to its cryptographic nature.
- The new version of the ledger or blockchain is forwarded to all nodes.
This is the basic operation of a cryptocurrency transaction using blockchain technology, but blockchain applications have gone much further.
From means of payment to exchange value
It is true that, originally, the blockchain ecosystem was created as a means of payment, as in the case of Bitcoin, but virtual assets have evolved to become an exchange value in different scenarios. For example: decentralised investment through Ethereum.
Its main difference with payment networks is that it allows transactions beyond payment thanks to the presence of smart contracts.
The development of decentralised investment platforms offers the opportunity to create a token or digital asset that grants the right to obtain different benefits. This is what we know as tokenisation, or the division of an asset into different parts. In the case of a property, such as a building, the asset cannot be divided, so a token representing it is created.
As a result, something with a lot of value can be shared among many people and have more liquidity in the market.
when to use a decentralised investment platform?
Following the example of tokenising a building to get investors and obtain a return, you need a platform that manages the property and allows investors to make their contributions, as well as an EAF agent to sign the token issues of the property. This platform could be centralised or decentralised.
If it is centralised, users will deposit the money to buy the tokens, as happens in most exchanges, and for this, you will need a virtual money institution to provide you with an escrow account, which implies a higher cost and security risk, as you will have all your assets at your disposal.
If it is decentralised, usability is reduced, but the costs are much lower and the assets are in the electronic wallets of each user, so it is much safer. Purchases on decentralised investment platforms are made with cryptocurrencies from your wallet or from the integrated platform.
Despite their differences, both platforms operate against the same backdrop: investors must do a KYC (identify the investor to comply with money laundering law) and a suitability test (check that the person knows what they are doing) before buying.
what other factors are involved in the development of the investment platform?
We have compiled some key requirements to consider in the process:
- Development of the security token smart contract, which is responsible for controlling the issuance of tokens, as well as their delivery.
- Manage the distribution of investors' profits.
- Choosing the blockchain that you are going to use in the development, taking into account that each one has its advantages and disadvantages. The two most used are Ethereum and Binance Smart Chain.
do you need help? Would you like to know more about the development of investment platforms? Request a blockchain consultancy with the Occam Digital Agency team and don't be left with doubts.
