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| By Chris Coney |
Every new technology starts out raw, basic and everyone is weary of it.
The first cars were big, clunky, inefficient, unreliable and only did one thing, move.
The first road car you could actually buy was made available in 1894 and was the Benz Velo:
Today, we have cars with hybrid petrol-electric power trains, heated and cooled seats, air conditioning, touch screen displays, traction control, automatic gearboxes, parking sensors and ultimately, a self-driving function.
While the first cars and the latest are basically the same thing, we don’t really recognize them as such.
Once we get comfortable with the basic functions of a new technology, we then tend to turn our attention to what else we can do with it or how else we can enhance what we’ve already got.
Crypto and DeFi are not exceptions to this.
From Bitcoin to DeFi
In the beginning, there was only Bitcoin (BTC, “A-”), and Bitcoin only did one thing, send transactions.
Once we got to grips with transactions on a blockchain using wallet addresses we then came up with Ethereum (ETH, “B”), which allowed multiple things to be done during a transaction.
Instead of just moving funds from A to B like Bitcoin, Ethereum allowed for multiple steps to be taken in between A and B.
Then (using the Ethereum tools) people started to create ever more sophisticated transactions.
“What if we did this? What if we did that?”
And before long, the blockchain developer community was starting to duplicate the financial services industry on the new blockchain technology.
That was the birth of decentralized finance.
Innovation on Top of Innovation
While DeFi was an evolution several generations on from Bitcoin, the innovation does not stop there.
Now that more people are becoming comfortable using DeFi, the question comes around again: “What else can we get it to do?”
Following the trend of reimagining traditional financial services on blockchain technology, there are many instances where transactions involve multiple parties.
It may not be immediately obvious, but if you think about it, most of what people are using right now is working with an individual wallet of their own.
But what about simple things from traditional finance like joint bank accounts where two people share ownership of a pot of funds?
And more sophisticated than that, what about when those two people want to be joint parties in a financial transaction that originates from that joint account?
If DeFi is truly going to supplant TradFi then it is going to have to accommodate these use cases.
Multi-Signature DeFi
Let’s say you are a member of my Crypto Yield Hunter newsletter, and you want to invest in one of the recommendations.
The way it works right now is you open up your wallet, connect to the relevant DeFi app, sign the transaction and it gets processed.
That is simple enough because there is only one decision maker, one single owner of the assets and thus only one signature required.
But what if the funds to be invested are jointly owned by two friends?
Who holds the key to the wallet? And how do you ensure that person doesn’t conduct transactions the other doesn’t agree with?
The answer to that is to conduct your DeFi transactions from a multi-signature wallet.
Slicing the Avocado in Two
Avocado is currently the wallet recommended for DeFi in my Crypto Yield Hunter newsletter.
It now features a multi-signature function where two or more individual Avocado wallets can be added as signers to the multi-signature wallet.
The multi-signature wallet is a wallet of its own with a unique wallet address, meaning this is where joint funds would be held.
Each individual party to those funds would then be added as signers to that wallet. That way, whenever a DeFi transaction is proposed using funds in that wallet, the transaction does not get submitted until the required number of individual signatures have been provided to authorize it.
Using my simple example from a moment ago, the multi-signature wallet would have two signers, the two friends.
Then, when they want to do a DeFi transaction, they must both independently sign that transaction with their own individual wallets.
This ensures that if they don’t agree, nothing happens.
Multi-signature wallets have been around since the birth of Ethereum and smart contracts. But tools are just tools until they are applied to a use case that solves a problem.
Here we are exploring how DeFi evolves into a useful tool beyond what a single individual can do with it and onto how couples and even larger groups can collaborate with it.
Multi-signature wallets can be configured in many different ways with many different parties.
You might have three friends in an investing group and require all three signatures for a transaction to go through.
Or maybe the three friends decide that the majority rules and set up their wallet so only two out of three signatures are required for the transaction to go through.
Maybe you need five out of six signatures, maybe three out of five, you get the idea.
You configure the rules when you first create the multi-signature wallet and add the wallet addresses of all the individual signers.
There is also a recovery aspect to this setup in the sense that, if some people lose their keys, as long as enough keys remain to reach the signing threshold — say three out of six — then the funds can be transferred out to a brand-new multi-signature wallet.
The people who lost their keys can simply be issued with new ones for the new wallet and everything is back to normal.
Conclusion
So, you can see how DeFi and multi-signature wallets were two technologies that were invented on top of blockchain technology to create something more sophisticated.
Then these two were combined to make something even more sophisticated.
And this process will continue.
Now we have the ability for groups to engage in decentralized finance transactions, that can be combined with any number of other innovations to evolve things even further.
If we can go from the Benz Velo that I showed you at the beginning of the article to the new Lamborghini Revuelto today, you start to get an idea of how far things can progress from the first basic Bitcoin transactions to where they are going to end up.
But that’s all I’ve got for you today. Let me know what you think about this topic by tweeting at me.
I’ll catch you here next week with another update.
But until then, it’s me, Chris Coney, saying bye for now.
