“Raqamli iqtisodiyot va sun’iy intellekt texnologiyalarining jamiyat rivojlanishidagi ahamiyati”
mavzusidagi xalqaro ilmiy-amaliy konferensiya 2024-yil 22-noyabr, Tоshkеnt, O‘zbekiston
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DECENTRALIZED FINANCE (DEFI): THE NEXT FRONTIER OF BANKING WITH
BLOCKCHAIN AND AI
Ruzimboy Bekjanov Ganijan ugli
Third-Year Bachelor’s Student in Telecommunications
Technologies at Urgench Branch of Tashkent University of
Information Technologies named after Muhammad al-
Khwarizmi
ruzimboybekjanov@gmail.com
https://doi.org/10.5281/zenodo.14195850
Abstract: Decentralized Finance (DeFi) represents a groundbreaking shift in the
banking sector, transforming how financial services are accessed and managed through
blockchain and AI technologies. This paper explores the foundation of DeFi, powered by
blockchain and enhanced by AI, and its implications for the future of finance. We discuss
the advantages and challenges of DeFi, envisioning a future where finance is decentralized,
transparent, and more accessible than ever.
Keywords: Decentralized Finance, Blockchain, AI, DeFi, Smart Contracts,
Financial Technology, Banking
Introduction: The Rise of DeFi
Decentralized finance (DeFi) is transforming the financial sector by removing
traditional intermediaries like banks and institutions, and replacing them with blockchain
technology. This shift allows for direct peer-to-peer transactions, offering greater
transparency, lower fees, and increased accessibility, especially for those without access to
traditional banking.
DeFi is built on the principles of decentralization, security, and transparency,
facilitated by smart contracts—self-executing contracts coded to automatically enforce
terms without a middleman. While the concept has existed for some time, it was Ethereum’s
introduction of smart contracts in 2015 that truly unleashed the potential of DeFi.
Today, DeFi continues to grow rapidly, driven by blockchain and AI technologies,
promising a more inclusive and efficient financial system. However, challenges like security
vulnerabilities and regulatory uncertainty remain, which this article will explore, along with
the role of developers in advancing DeFi.
“Raqamli iqtisodiyot va sun’iy intellekt texnologiyalarining jamiyat rivojlanishidagi ahamiyati”
mavzusidagi xalqaro ilmiy-amaliy konferensiya 2024-yil 22-noyabr, Tоshkеnt, O‘zbekiston
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Blockchain as the Foundation of DeFi
Blockchain technology is the backbone of DeFi, providing a decentralized ledger
that ensures the transparency, security, and immutability of transactions. In a traditional
financial system, banks and other institutions act as trusted intermediaries, verifying and
recording transactions. Blockchain, on the other hand, eliminates these intermediaries by
using a distributed network of computers (nodes) to validate and record transactions in a
secure, transparent, and decentralized manner.
Each transaction on a blockchain is recorded in a “block,” which is then linked to
the previous block, creating a chain. This chain of blocks is immutable, meaning once a
transaction is recorded, it cannot be altered or tampered with, providing a high level of
security and trust. The decentralized nature of blockchain means no single entity controls
the network, making it resistant to censorship or manipulation.
One of the most significant contributions of blockchain to DeFi is the introduction
of
smart contracts
. Smart contracts are self-executing contracts with the terms of the
agreement directly written into code. When predefined conditions are met, the contract
automatically executes the transaction without the need for intermediaries. This feature
eliminates the need for trusted third parties and reduces the costs and time associated with
traditional financial services like lending, borrowing, and trading.
Blockchain also enables the creation of
decentralized applications (dApps)
, which
are built on the blockchain to offer financial services such as insurance, lending platforms,
and decentralized exchanges (DEXs). These dApps are powered by the blockchain’s
security and transparency, allowing users to trust that the services they are using operate
without central authority oversight.
Traditional banking vs. blockchain infographic.
“Raqamli iqtisodiyot va sun’iy intellekt texnologiyalarining jamiyat rivojlanishidagi ahamiyati”
mavzusidagi xalqaro ilmiy-amaliy konferensiya 2024-yil 22-noyabr, Tоshkеnt, O‘zbekiston
86
DeFi common mechanism and revenue strategy.
o
Protocol:
A collection of smart contracts encompassing various facets like
PLFs, AMMs, or yield aggregators. These protocols offer open, noncustodial,
permissionless, and composable financial services in exchange for nominal fees levied on
asset movements, such as borrowing or swapping.
o
Investor:
This participant assumes the underlying protocol risk, including
potential misbehavior, impermanent loss, or rug-pulls, in return for passive income. Their
primary role involves depositing assets and providing liquidity to these financial services.
o
User:
Typically, users interact with the protocol in real time, not expecting
extended responses. However, in the case of yield aggregators, users may also function as
investors. Users initiate asset movements and pay interest rates to the protocol.
o
Financial Service:
The linchpin of the entire protocol, this entity locks
assets, fulfills asset movement requests, and safeguards against protocol misuse.
Additionally, it can act as an investor by leveraging other DeFi protocols, ultimately
delivering yields and earnings to other participants.
DeFi services come with costs that impact investors seeking passive income. The
additional interest generated through these services encounters a kind of “tax” imposed by
the DeFi protocol. Conversely, users willingly pay fees to access the platform’s services.
Consequently, the DeFi protocol earns revenue from both user segments. This market and
business model mirrors the concept of “Two-Sided Markets”, familiar in TradFi.
Methodology
This research was conducted in several stages. We employed a descriptive
qualitative methodology incorporating literature reviews and phenomenological research.
Our initial approach involved scouring through journals, white papers, articles, and websites
to gather information about DeFi. This study aims to create a taxonomy with a substantial
influence on DeFi. While our taxonomy offers a comprehensive conceptual and empirical
map of the emerging DeFi landscape, we recognize the significance of constructing a
broader taxonomy that is more accessible to the public. Given the early stage of blockchain
technology in the financial industry, diverse literature views and approaches can benefit a
“Raqamli iqtisodiyot va sun’iy intellekt texnologiyalarining jamiyat rivojlanishidagi ahamiyati”
mavzusidagi xalqaro ilmiy-amaliy konferensiya 2024-yil 22-noyabr, Tоshkеnt, O‘zbekiston
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wider audience; the research flow is illustrated in the following picture. To enrich and
complete the taxonomy, we introduce several additional discussion aspects:
Benefits of DeFi: A Developer’s Perspective
Decentralized finance (DeFi) offers significant benefits for both users and
developers. From a developer’s perspective, DeFi provides an open, permissionless, and
innovative environment to build transformative financial solutions without the constraints
of traditional finance systems.
Key benefits of DeFi for developers include:
•
Enhanced Financial Inclusivity
: DeFi platforms are open to anyone with
an internet connection, eliminating barriers such as credit scores or geographic restrictions.
This fosters financial inclusion by enabling access to services for the unbanked and
underbanked populations worldwide.
•
Reduced Costs
: By removing intermediaries like banks, brokers, and
financial institutions, DeFi reduces transaction fees significantly. Smart contracts automate
transactions, which reduces administrative costs and operational overhead. Developers can
build applications with lower costs and greater flexibility.
•
Security and Transparency
: Blockchain technology ensures that all
transactions are recorded on an immutable ledger, providing transparency and
accountability. Smart contracts are tamper-resistant, offering a higher degree of security
than traditional systems, where errors and fraud are more common.
•
Opportunities for Innovation
: Developers can create decentralized
applications (dApps) for lending, insurance, asset management, and other financial services.
The open-source nature of DeFi promotes collaboration and sharing of code, speeding up
development cycles and encouraging innovation.
DeFi’s open ecosystem, reduced operational costs, and security features create a
fertile ground for developers to innovate and contribute to the growing financial ecosystem.
Research workflow.
“Raqamli iqtisodiyot va sun’iy intellekt texnologiyalarining jamiyat rivojlanishidagi ahamiyati”
mavzusidagi xalqaro ilmiy-amaliy konferensiya 2024-yil 22-noyabr, Tоshkеnt, O‘zbekiston
88
DeFi users over time. Scientific Diagram.
Conclusion: The Future of DeFi and Blockchain Integration
Decentralized finance (DeFi) represents a paradigm shift in how financial services
are delivered, offering greater accessibility, transparency, and security compared to
traditional systems. By leveraging blockchain technology and AI, DeFi has the potential to
revolutionize everything from lending and borrowing to asset management, insurance, and
beyond. It creates an ecosystem where financial services are not only more inclusive but
also more efficient, reducing the reliance on intermediaries and lowering costs for users.
For developers, DeFi provides a unique opportunity to innovate within a rapidly
growing field. The decentralized, open-source nature of blockchain enables the creation of
a wide array of decentralized applications (dApps) that cater to various needs, from
microloans to decentralized exchanges (DEXs). While challenges such as scalability,
security, and regulatory compliance remain, the benefits of DeFi far outweigh these hurdles,
offering promising solutions for a future where financial freedom is decentralized.
As the DeFi ecosystem continues to evolve, the collaboration between blockchain
and AI technologies will play a crucial role in shaping the future of finance. Developers
will remain at the forefront of this transformation, building the tools and platforms that will
drive the next wave of innovation in financial services.
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