Minna san, koko ni n wa hajime mashita.
Don’t think about it too much, that’s me flexing a 66-day streak on Duolingo learning Japanese. It means “everyone, we will begin here”, but what is here and why did this piece start this way?
We’re about to learn the concept of DeFi, or decentralized finance, and why it is relevant in the world of today where crypto seems to be converting people into its movement by the thousands. We will begin with the origin of finance because I have come to understand a lot of us know the word and think we have a certain peripheral understanding of it when in fact if asked to speak on what finance is, we may not have that much knowledge as we claim, to express ourselves.
After that we will explore the birth of centralized finance and how it has brought about the world we have come to operate in, then we will take a look at finance in the world of crypto and the platforms/software that power it.
Sorede…
A BRIEF ON FINANCE
Basic economics states that for a market to function it needs to operate on the model of supply and demand. Right from when our hunter-gatherer ancestors began exchanging one item for another to satisfy two needs at once; doing so for everything from fancy stones to even their spouses and children, we as human beings have already begun to do what we will now come to know as trade or commerce. Trade is simply a transaction involving the exchange of goods and services. So if I want your 16 inch weave and you want my Chanel bag, we can make a swap and be happy we both got what we wanted.
Now when trade happens often for a set of goods and services, what will be formed as a result is called a market. A market is formed out of frequency of trade or in much simpler words, frequency of demand and supply. Anything from sex work, drug trafficking, hedge funds to a lemonade stand--once there’s frequency of demand and supply what you have there is called a market.
The big popper here is: what drives a market? Finance. Crazy right? You see long before we decided pieces of paper with fancy designs and the face of national heroes should be our means of legal tender, human beings have developed their own various forms of what we call money, and the concept of it as well has evolved over time. In ancient South America, they used plants tied together in bunches; in Africa & the Middle East they used cowries, cloth and livestock; in Asia they used copper tabs tied with rope; in Europe they used coins made from brass and copper.
See? What you will notice is that while the concept of money changed over the millennia, finance was still the driver for all markets: new and old.
As we gradually (thanks to the British) began making paper money our valid legal tender across the world, it became important for us to have ways of managing this money and even using it to make more money. This brought about…
CENTRALIZED FINANCE
During the time when human beings had begun making money, we discovered we couldn’t just keep printing paper that in itself had no value. So we set it against a determiner: which at that time (and frankly still) is gold. How much of that paper is worth this amount in gold? If I take this amount of my gold and give it to you, how much of that paper will I get so I can buy my family a house? These questions raised more questions until the need arose to find/create institutions that could manage and cater for the monetary needs of the human race.
That’s how commercial banks were born. To handle the savings, trade, loan and transfer of money for individuals and businesses. Few years down the line, we had mortgage banks that did the same thing but focused on houses. Then we had investment banks; retail banks too!
All these mentioned above are called centralized institutions (like the central bank?) because they are the sole bodies responsible for making decisions that affect the individuals and businesses who use them; decisions on things like rates, policies, practices, limitations and even laws that guide the world of finance as we have come to know it. It’s all controlled by them and them alone.
In 2008, when the global economy fell to its knees, these centralized finance institutions said “Hey we’re bleeding money, let’s invent what’s called credit. We give people money they don’t have so they can buy or pay for anything, and take it from them when they earn. If they can’t then they owe us big time because we have interest rates that accumulate as they don’t pay us back”.
Sound invention, but the crash began to breed distrust for the affairs they ran and how they ran it--because people felt banks were cheating them and to an extent, they were.
BLOCKCHAIN SOLVES THIS
This is a popular phrase among crypto twitter. But in essence it is correct to a certain degree because a good number of processes in the real world have been replicated and even made much better on the blockchain. So what stops developers from bringing finance into the blockchain and making things as decentralized as possible? The answer is: nothing. You see, finance in crypto can be termed revolutionary and what makes it so is that anyone who has access to the blockchain can use the tools and services on it; facilitating everything they’d normally do at a bank--loans, savings, trading and even mortgage!
DeFi (DECENTRALIZED FINANCE)
This is the final boss of finance in crypto, and it is enabled through decentralized applications called DApps, that are built on a blockchain and they facilitate one or more elements of banking & commerce as we know it. It is important to state here that DApps do much more than just banking, finance, or commerce. They also function in so many other capacities like security infrastructure, cloud storage and even gaming. However for the purpose of this article, we are only looking at what concerns us.
So what kind of things can you do with DeFi DApps?
Buying artwork, try Opensea built on the Ethereum blockchain
Want to trade crypto, Pancake Swap built on the Binance smartchain
Want to lend your money to traders, try CurveFi built on the Ethereum blockchain.
Meanwhile you can learn more about DApps here.
WHAT MAKES DeFi SPECIAL?
The fact that anyone, anywhere with any amount of money has access to regular financial services at reasonable rates and can easily track transactions on the blockchain to see what’s going where and who’s doing what. It’s phenomenal. The market decides what’s best for its consumers and yeah you guessed it, it is these consumers who contribute to the makeup of the market. The best part is, this is the fundamental makeup of DeFi 1.0, meanwhile DeFi 2.0… Haha, that’ll be in a later article.
To close this off, I believe you are now aware of the history and evolution of finance as we know it and where it is, at the moment. I hope you try your hands on some DeFi while still keeping one foot in CeFi. For the sake of safety, lol haha.
Cheers!
Thanks for reading. Please don’t forget to share!
Another insightful read!