{"id":28368,"date":"2022-09-08T03:29:21","date_gmt":"2022-09-08T03:29:21","guid":{"rendered":"http:\/\/egrowonline.com\/?p=28368"},"modified":"2022-09-08T03:29:21","modified_gmt":"2022-09-08T03:29:21","slug":"what-would-a-financial-system-based-on-blockchain-look-like","status":"publish","type":"post","link":"http:\/\/egrowonline.com\/?p=28368","title":{"rendered":"What Would a Financial System Based on Blockchain Look Like?"},"content":{"rendered":"


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Could blockchain could decentralize finance by establishing trust and security without government regulations? In \u201cWhat Is Decentralized Finance?\u201d<\/a> (September 1, 2022), computer engineers Adam Goad<\/a> and Austin Egbert<\/a> are back with Walter Bradley Center director (and computer engineering prof) Robert J. Marks<\/a> to discuss how such a system might work. Or maybe not. It didn\u2019t work<\/a> with decentralized autonomous organizations\u2026 But then again, this might be simpler.<\/p>\n


\nhttps:\/\/mindmatters.ai\/wp-content\/uploads\/sites\/2\/2022\/08\/Mind-Matters-202-Adam-Goad-Austin-Egbert.mp3<\/a><\/audio><\/p>\n

A partial transcript, notes, and Additional Resources for the first half follow.<\/p>\n

What difference would decentralized banking make to the average customer?<\/h2>\n

Robert J. Marks:<\/em> When you pay Uber for a ride, you use a bank or a third party like PayPal, or Visa, or MasterCard, or something. Decentralized banking, hopefully, will let you pay for the Uber driver directly without a third party. So Adam, what is centralized finance? What is decentralized finance, and why should I care?<\/p>\n

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Adam Goad<\/figcaption><\/figure>\n<\/div>\n

Adam Goad:<\/em> Good question. Centralized finance is the system we have Whenever you want to pay for something, you take out your credit card, swipe it, and it goes over the internet. The bank figures out who you\u2019re trying to pay and sends them some money, if you [have the money in your account]. The currency is also regulated by the government. We have the Federal Reserve Bank and they have all sorts of control over how much money is printed, setting interest rates, all sorts of things.<\/p>\n

With decentralized finance, you do not have these central authorities with this power over the currency. Like you said, if you want to pay that taxi driver, you could just send a transaction directly, using Bitcoin or Ethereum, or something. Those currencies cannot be blocked. They do not run through a centralized exchange of any kind. They can be sent just through the distributed system of the blockchain that we talked about previously. The record would be in the public ledger. You sent him money, he could confirm that, and you can both go along your way.<\/p>\n

This has several benefits. It prevents any kind of centralized regulation. You can<\/em> have regulation in a decentralized finance. Last time we spoke briefly about DAOs (decentralized autonomous organizations<\/a>).<\/em> Several of these larger decentralized finance projects<\/a> (DeFis)<\/em> are run as DAOs, where people who have invested money in them get a say in how it is run.<\/p>\n

It is run purely as code. Anyone can confirm this code and what it\u2019s doing, and that it\u2019s doing what it says it\u2019s doing. People can make proposals and vote on changes to the code. And the code can only be changed if everyone approves these changes, or at least a majority, or whatever the rules are for that particular DAO for how many people must approve.<\/p>\n

Robert J. Marks:<\/em> So the bottom line is that individual users have more control and transparency over their finances. I like that. You don\u2019t have to go through a third party. How does this work? How do the blockchains enter into this in order to establish trust and stability. In terms of the decentralized finance, what\u2019s the role of blockchain here?<\/p>\n

Adam Goad:<\/em> You mentioned trust. The blockchain adds trust because it is a trustless system.<\/em> It does not require you to trust anyone in order to use it.<\/p>\n

Robert J. Marks:<\/em> Okay. This is interesting because I\u2019ve seen the word trustless<\/em> and \u201ctrustless\u201d doesn\u2019t sound good. But in the context of crypto, it means you don\u2019t have to trust any human. So trustless always refers to humans. Is that right?<\/p>\n

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Note:<\/em> \u201cA trustless system means that the participants involved do not need to know or trust each other or a third party for the system to function. In a trustless environment, there is no single entity that has authority over the system, and consensus is achieved without participants having to know or trust anything but the system itself.\u201d \u2013 Binance Academy<\/a><\/em><\/p>\n<\/blockquote>\n

Adam Goad:<\/em> If you want to transact on a blockchain, in order to use funds in an account, you need the private cryptographic key for that account. That\u2019s a long string of letters and numbers that you should keep private, because anyone who has that string can have complete control over the funds in that account. Using that private key, along with your public key \u2014 which in most cases is your address or a derivative of it, you can encrypt any transaction and send it off to the blockchain. It\u2019s encrypted in such a way that it can be confirmed that it was signed by your private key as long as someone knows the public key. And the public key can also be derived from the way it was signed.<\/p>\n

After the blockchain \u2014 and anyone else who wants to \u2014 is able to confirm that I sent this transaction to the chain, the ledger (the chain itself) would then have a record that my account sent the money to your account. And you can go check the chain. You can use various services that will check it for you and just tell you your balance. You\u2019ll know that I have sent you the money and there it is. We didn\u2019t have to talk to any banks. We could\u2019ve used any number of Ethereum nodes, or any other kind of chains, nodes distributed all over the world, without a centralized authority having a say in things.<\/p>\n

Privacy on a blockchain is different from privacy at a bank<\/h2>\n

Robert J. Marks:<\/em> Interesting. It does seem though, like blockchain has replaced the bank as the third party. So what\u2019s the advantage of using blockchain instead of a bank?<\/p>\n

Adam Goad:<\/em> So, it\u2019s not that blockchain doesn\u2019t tell anyone what\u2019s going on, instead it tells everyone<\/em> what\u2019s going on.<\/p>\n

Robert J. Marks:<\/em> Okay. So blockchain knows how much you paid the Uber driver?<\/p>\n

Adam Goad:<\/em> Yes. And everyone else in the world can know too. But what they don\u2019t<\/em> know is who you are, or who you paid or, why.<\/p>\n

Robert J. Marks:<\/em> Oh, now that\u2019s interesting. If they don\u2019t know who I am, who I paid, or why I paid them, then that looks like a lot of privacy. So that\u2019s the advantage that this decentralized finance gives, is that right?<\/p>\n

Adam Goad:<\/em> Exactly. All that\u2019s recorded is that this address paid this address this much at this time. Who owns those addresses? Why did they feel the need to send that money? None of that is stored. And you\u2019d have to know a lot about someone to figure it out.<\/p>\n

Robert J. Marks:<\/em> Where do these decentralized finance blockchains live? Do they live on your computer?<\/p>\n

Adam Goad:<\/em> The blockchain lives on anyone\u2019s computer that wants to have a copy, pretty much. It can be fairly intensive. So you need a pretty powerful computer if you want to be what\u2019s known as a node. A node is a computer that stores a copy of the blockchain and helps to process the blockchain.<\/p>\n

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