A Brief History on DeFi

Decentralized finance or Defi), is a new financial system that is not dependent on centralized financial intermediaries or entities. By nature, it is a borderless and open financial system enabled by blockchain technology.

DeFi is a borderless and open financial system enabled by blockchain technology”

Comparing it to the system we use today, DeFi enables new ways to exchange anything of value as decentralized entities vs. centralized entities (e.g., US Federal Reserve, Big Banks, etc.,). Alyssa Hertig at Coindesk says:

“DeFi draws inspiration from blockchain, the technology behind the digital currency bitcoin, which allows several entities to hold a copy of a history of transactions, meaning it isn’t controlled by a single, central source. That’s important because centralized systems and human gatekeepers can limit the speed and sophistication of transactions while offering users less direct control over their money. DeFi is distinct because it expands the use of blockchain from simple value transfer to more complex financial use cases.”

DeFi provides an “open and global financial system built for the internet age – an alternative to a system that's opaque, tightly controlled, and held together by decades-old infrastructure and processes”

It all started with Bitcoin.

According to Mason Marcobello at DeFiant, “the concept and very term “DeFi” was birthed in an August 2018 Telegram chat between Ethereum developers and entrepreneurs” However, “Bitcoin in many ways was the first DeFi application. Bitcoin lets you really own and control value and send it anywhere around the world. It does this by providing a way for a large number of people, who don't trust each other, to agree on a ledger of accounts without the need for a trusted intermediary.

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Bitcoin is open to anyone and no one has the authority to change its rules. Bitcoin's rules, like its scarcity and its openness, are written into the technology. It's not like traditional finance where governments can print money that devalues your savings and companies can shut down markets.

DeFi builds on this. Like Bitcoin, the rules can't change on you and everyone has access. But it also makes this digital money programmable, using smart contracts, so you can go beyond storing and sending value.”

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“Although Bitcoin helped pave the foundations for an open and meritocratic financial system,  the limitations of its programming language, Script, prevented a range of solutions that most central financial services and products are capable of offering to their clients such as lending, borrowing, and derivatives.

These limitations, however, helped provide an incentive for Ethereum, which launched in 2015. With a Turing-complete programming language known as Solidity and a flexible ERC-20 contract standard that allows for compatible fungible tokens and applications, Ethereum provides developers with the freedom and flexibility to build on its protocol. In doing so, it functions as one of the first truly programmable versions of money.”

Source: Ethereum Foundation

Why is DeFi Important?

We're dependent on these centralized players, who make money on our behalf.

Thankfully, DeFi provides a better way to transact. No longer are we confined to centralized entities to acquire and transfer items of value.

According to Coinbase, Defi created an entire digital alternative to Wall Street but without all the associated costs. DeFi has the “potential to create a more open, free, and fair financial markets that are accessible to anyone.”

DeFi vs traditional finance

One of the best ways to see the potential of DeFi is to understand some of the problems that exist today in traditional finance or TradFi.