Let us go back to the history of money; precisely the history of financial banking. Banking started with the need to finance farming, tradings, and merchants of ancient civilizations. For example, in ancient Rome, the temple priests would often give loans in silver, gold, or any metal coins to farmers so that they could buy grains for their farming. Later during harvesting, the farmers would pay back to the temple. Or how during the Vikings era, the earls would often finance their raiders to other cities or kingdoms, and when they would return they would share the profits. Thus, the concept of lending, borrowing, and storing has been practiced since time immemorial.
With the progression of civilization and the generation of economy, nation-states started to form. With nation-states, modern days’ banking started to rise which were directly controlled by centralized institutions (government). The standard of living upgraded and people started borrowing more money as loans to create businesses. Banks started giving more and more credit to anyone willing to take, thereby issuing more bonds, while the borrowers got into debts.
After World War 2, the United States economy boomed as the result of their victory, and the 1944 Bretton Woods Agreement made the US dollar the world reserve currency. The central banks linked their currency to the U.S dollar which was linked with gold. Until August 1971, the entire world’s money was backed by gold that was stored in the United States treasury. With the suspension of the convertibility of the dollar into gold, the central banks across the world took advantage to print more and more paper money out of the thin air, causing inflation and shifting the production economy to a speculation economy.
Today this speculation economy led to the rise of the stock market, creating wealth for investors and generating an economy. The financial industry evolved with advancements in technology and time. From manual records to electronic and digital trading, from hard paper records to digital bank ledgers, from cheques to the creation of ATM, modern-day banks play a huge role in the national economy, yet, it is far from perfect; there are issues unsolved. Financial decisions are made only by a privileged few behind closed doors. Inefficiencies in bank processes, billions of dollars scandals, frauds and scams around financial institutions, non-transparency in storing of values, and financial institutions being controlled only by top banks are some of the few loopholes. These in turn controls the majority of the transactions, leaving the common men with no choice but to compel them to abide by their rules and regulations.
That finally brings us to Decentralize Finance.
What is Decentralized Finance?
Decentralized Finance or DeFi is a financial concept that leverages the idea of Cryptography, Decentralization, and Blockchain & providing financial services like buying, selling, lending, borrowing, and trading in a more efficient, fair, and open manner.
The core ideas that shape DeFi are:
- Efficient- Transaction and trading using a DeFi application are almost seamless, with no third-party involved, every process takes place in a network and takes just a few fractions of a second.
- Fair and Trustless- Since there is no third party involved, there is no one to put your trust to. It is only the protocols written in the code that will execute all the transactions. With no third party involved, this peer-to-peer transaction is fair. The protocols work on the IF-THEN concept, for example, if *this* then *this*, if the IF doesn’t meet the condition, then the THEN cannot be executed.
- Open and Transparent- All the DeFi applications are open source meaning you can see how the code and all the protocols are written making it completely transparent. All the transactions ledger are made public and distributed.
History of DeFi
Exactly 45 days after Lehman Brothers declared bankruptcy, on October 31st, 2008 a nine-page whitepaper was released by pseudonym Satoshi Nakamoto, never did we know that this would lead to change so much of our world. Thanks to Blockchain Technology. The history of DeFi starts with the start of bitcoin, though bitcoin may not fully support all the other financial services like other DeFi projects. Satoshi Nakomoto, whose identity is still unknown to this day, through his Bitcoin gives an intuition of decentralized finance. Bitcoin is the outcome of the Peer-to-Peer Electronic Cash System whitepaper, a way of sending and receiving money without the need of intermediaries. Bitcoin technology giving rise to DeFi inspired other innovators. In 2015 Vitalik Buterin created Ethereum which brought a whole new level to what DeFi is today. Most of the DeFi projects are now built on the Ethereum blockchain. From Decentralized Exchanges to ICOs, the Ethereum power blockchain is used to build other DeFi projects and the rest is history.
DeFi and Smart Contracts
By now you would have probably known that Decentralized Finance is based on Smart Contracts. Let us dive deeper into what exactly smart contracts are. Take for example a coca-cola vending machine. If a bottle of coca-cola costs ₹20/- and you put only ₹10/-, the machine will not give you coca-cola, you will get your coca-cola only if you put ₹20/-. Smart Contracts work in the same way. To execute the transaction the conditions should be met. It uses the IF-THEN function, meaning if the IF condition is met, then it executes the THEN function thus giving fully automated and deterministic results.
These smart contracts provide Immutability, Trustless, Speed, Security, and Cost efficiency,
- Immutability- Just like any cryptocurrencies, smart contracts are built on a blockchain that cannot be changed once written, meaning once the contract is written and information is stored in the blockchain, no party can manipulate the information or asset values.
- Trustless- Since a smart contracts approach is automated and deterministic, it executes the transaction only if the conditions written on the code are met thus providing fully trustless execution. You don’t have to trust anybody, the code will do it for you.
- Speed- With no intermediaries involved, this automated smart contract provides speed.
- Security- All the transaction ledgers are stored in blockchain making it impossible for anyone to be hacked, your transactions are fully secured.
- Cost-Efficient- With no intermediaries involved, you don’t have anyone to pay charges for, there are no hidden charges.
With all these features, you can send, receive, store and trade through smart contracts.
Future and Conclusion
The world is changing at a very high pace. The Internet and World Wide Web has changed our world in the early 2000s. Again in the last decade Information and Data changed our worlds. In the new decade of the 2020s, Decentralization will surely change the way we live by the decentralization of information, decentralization of finance, and decentralization of institutions. Humans want more transparency, efficiency, and more control of their life.
Looking forward, the concept of decentralized finance can be used in many other industries like Healthcare where you can expect the efficiency of storing your medical records, or in any Government, where you can expect a fair and clean election process and corruption-less process of distribution of funds, in a Corporation where you can exactly record your employees work delivery and pay them efficiently. The idea of silicon valley of California, Wall Street of New York or the Financial district of London and Hong Kong are changing. People are moving to the country from downtown, opportunities are getting distributed and great things are moving faster. Thus the bottom line is, ‘Another
music is about to play.
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