DeFi, finance or decentralized investment?
There are multiple ways to call the development of decentralized investment platforms, starring in recent years by Ethereum, Bitcoin and other networks. There are many concepts related to the process of creating a decentralized 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 origin in the birth of cryptocurrencies, you are right, but the idea has gone much further.
What are decentralized investment platforms, how are they developed and what has been their evolution? Stick around because we’re here to tell you.
Some basic concepts before we start
Blockchain technology (blockchain): it is a distributed database formed by a series of blocks that prevent the modification of the information contained in it once 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: it is a programmable and self-executing agreement that allows value transactions with special conditions. For example: a user can program a contract to send 20 euros now when that cryptocurrency reaches a specific price, or when an exact period is fulfilled.
Token: it is a digital asset or unit of value hosted on a blockchain and that allows the owner to attribute it to a third party through the chain. Its value can contain several layers
Ethereum: is a decentralized, open-source platform that allows the creation of smart contracts. It uses the Ether token, with which these contracts can be executed.
Cryptocurrency: is a virtual currency or digital medium of exchange used in public blockchains. Examples: Ether or Bitcoin.
What is decentralized investment?
In a technical way, this concept is born from blockchain technology (blockchain) to eliminate intermediaries and allow people to control their finances directly with protocols built from smart contracts (smart contracts).
How does blockchain technology work in sending a transaction?
Suppose you already have a digital wallet with Bitcoins, and you are going to make a simple transaction with this currency to another user of the network. Both of you 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 the information immutably in blocks. After a period, this information can no longer be modified. 5. The blocks are created by network nodes that participate in the data writing process 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) test. This proof makes the activity of potential attackers more difficult 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 money transaction through 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 is the case with Bitcoin, but virtual assets have evolved to become an exchange value in different scenarios. For example: decentralized investment through Ethereum.
Its main difference with payment media networks is that it allows transactions beyond payment thanks to the presence of smart contracts or smart contracts.
The development of decentralized 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 tokenization or 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 of great value can be distributed among many people and have more liquidity in the market.
When to resort to the creation of a decentralized investment platform?
Following the example of tokenizing a building to get investors and obtain profitability, you need a platform that manages the property and allows investors to make their contributions, as well as an EAF agent that signs the token issues of the property. This platform could be centralized or decentralized.
If it is centralized, 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, since they have all your assets.
If it is decentralized, the 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 decentralized investment platforms are made with cryptocurrencies from your wallet or from the integrated platform.
Despite their differences, both platforms operate on the same backdrop: investors must do a KYC (identify the investor to comply with the 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. This is responsible for controlling the issuance of the tokens, as well as their delivery.
- Manage the investors’ profit sharing.
- Choosing the blockchain you are going to use in the development, considering that each one has its advantages and disadvantages. The two most used are Ethereum and Binance Smart Chain.
Need help? Would you like to learn more about investment platform development? Request a blockchain consultancy with the Venice Swap team and don’t be left with doubts.