The Solution - Decentralized Finance

This all changed in 2009 when Satoshi Nakamoto invented Bitcoin, solving the Byzantine General’s Problem and setting off a chain of events which made the concept of “decentralization” possible.

While the mechanics of this invention are a bit outside of the scope of this article, the key thing to remember is that he (or she) combined three technologies - blockchains, public and private key cryptography and consensus mining – to create a system that could autonomously authenticate economic actors, verify their funds and guarantee the completion of a transaction.

In effect, for the first time in history, Satoshi made it possible to perform direct, peer-to-peer transactions without relying on third parties to establish trust.

The effect of this cannot be overstated and requires a bit of “tabla rasa” thinking. Imagine for a bit, how you would design a financial system if you no longer needed intermediaries. After all, what’s the point of banks if you can safely hold your own assets? What’s the point of financial intermediaries if you can make loans directly? What’s the point of lawyers if everything is executed in code? What’s the point of exchanges if you can trade directly? What’s the point of regulators in an industry that can’t be regulated?

If you’re like me, you’re probably envisioning something much simpler and more elegant than what we have today…

That system is DeFi, and it may allow us to reap all the benefits of centralized banking – namely trust, security and growth – while removing most of the downsides. Indeed, DeFi offers:

• Self-Custody: Instead of relying on a bank or brokerage to hold your assets, you control all of your funds with your own wallet. As such, there’s no one to seize your assets, limit withdrawals or tell you where you can and can’t spend your money. Want to send all your life savings to a sketchy gambling website? Go for it!

• Permission-Less: Users don’t need permission from third-parties. Anyone with money and an internet connection can access any DeFi service and trade coins, create derivatives, lend and borrow, buy insurance, etc… in markets that are open 24 hours a day, 7 days a week and 365 days a year

• Private: Users can choose to (and often do) remain anonymous. As Coindesk so eloquently stated: “On the normal web, you can’t buy a blender without giving the site owner enough data to learn your whole life history. In DeFi, you can borrow money without anyone even asking for your name.”

• Efficiency: DeFi operates almost entirely via computer programs which automate the execution of financial transactions. As such, there’s no need for intermediaries such as bankers, regulators, lawyers, accountants, escrow agents, etc… making the system much faster and much cheaper

• Interoperability: DeFi protocols are built to be composable, that is, they can be programmed to work with one another allowing users to build increasingly complex and novel financial products

• Transparency: Every transaction in DeFi is broadcast to the public allowing for real-time monitoring and maximum transparency. In addition, protocols are built with open source code allowing any user to audit them

I know this is a lot to take in. Crypto is so unique, so transformative, so unintuitive that I’ve been studying it for over five years now and sometimes I feel like I only partially get it.

But to help you understand more about how DeFi can transform the world, let’s go a bit deeper down the rabbit hole…