Bitcoin, Ethereum, Decentralized Finance;

What's the noise about?

Humanity is on the verge of great innovation that will change our planet forever. The world of finance is experiencing a revolution, Decentralized Finance(DeFi) is changing the way we think about trade, money, and finance.

In the course of human history, finance has centralized itself around few institutions i.e banks(central, commercial, and investment), exchanges, clearinghouses e.t.c The average person can’t do any financial transaction without these institutions. If you need to deposit your cash for safekeeping, you’ll go to a bank.  If you need a loan, you head to a bank. If you want to send money from one person to another, the easiest and safest way to do it is through a bank and a bank account. Most of the world trade and finance in our modern world revolves around these institutions, any problem with them causes a ripple effect around the world evident by the financial crisis of 2008. 

But in recent times, the world’s attention is turning from these centralized financial institutions into a nascent innovation that was pioneered by a technology called Bitcoin created by an anonymous individual named Satoshi Nakamoto, in 2008, he sent out a white paper outlining the idea behind a project he had been working on, the first paragraph of the paper read. “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution,”

Satoshi was creating was a form of online cash that could be transferred without the need of intermediaries like banks, payment processors and the likes. It was purely peer to peer, although this isn't the first time we are seeing “peer to peer” as a means of doing financial transactions, this method of doing transactions and carrying out trade has been in existence ever since humans arrived on the surface of the planet; early humans traded peer to peer but this is the first time the world was experiencing a form of peer to peer that was cross-border, breaking the geographical barriers without the need of a central authority. It was unprecedented!

Although it caught on slowly, first among nerds and computer scientists on online forums before moving to online marketplaces. The first transaction that saw the exchange of bitcoin for physical goods was on the 22nd of May, 2010 when two pizzas were sold for 10,000 bitcoins. Since then, it has grown in an unprecedented way, sparking a new wave of innovation that will be tagged decentralization.

But how does bitcoin work? How does it manage to allow multiple transactions, wallet to wallet without the need of a central authority/ central server managing the whole thing?  Imagine a ledger/record book in a bank, where entries are made based on the transaction done. In a central system, as in the current traditional financial system, If I deposited money to my account, an entry is made by a cashier into a ledger that I deposited money, also if I withdraw money, it goes into the ledger that a withdrawal was made.

This ledger is controlled and held by the financial institution, no other individual has access to it, the financial institutions that own the ledger are the only persons allowed to write in it but with decentralization that came with Bitcoin, rather than have one person/individual/financial institution control the ledger, it's is disturbed across different nodes(computer) in the bitcoin network, with each node having an equal chance to write a transaction in the ledger and whenever a transaction is carried out, needed to be written into the ledger, the network selects a node through a kind of lottery system to write this transaction into the ledger and the node that get to write this transaction into the ledger get rewarded with bitcoin.

The ledger in this case is known as The blockchain, this way, Bitcoin broke the monopoly that the financial institutions had as an intermediary in the finance world. But bitcoin had its issues, it was too narrow in utility to fully challenge the current financial system.

The only thing you could do with the bitcoin blockchain was sending bitcoin from one wallet to another. You will agree with me that the current world of finance has grown more complex than just sending money from a party to another and this was basically the only function the Bitcoin blockchain had. Today, we have loans, derivatives, securities interests, exchanges, as part of the financial ecosystem, bitcoin didn't address any of these.

Entered Ethereum, In 2013, a programmer by the name Vitalik Buterin(not anonymous this time), proposed a solution to the Bitcoin narrow utility problem. The solution he proposed was also a decentralized ledger (blockchain) but rather for this new blockchain to have a single function, it was a general-purpose blockchain on which you could build anything you wanted.

The Ethereum blockchain is like a foundation, on which you could develop decentralized applications, and soon enough, everywhere was filled these type of applications which had a wide range of utility ranging from lending, cross border payment, flash loans, currencies exchanges, and other innovations,  All of which have been categorized under the big umbrella of Decentralised Finance(DeFi)

The DeFi space included the various forms of finance that Bitcoin left out, loans, exchanges, payments e.t.c this meant that we now enjoy the other perks of the finance world without needing an intermediary.  And the amazing thing about decentralization is that it provides access to a world of finance that has previously been restricted to the average person.

For example, A Nigerian living in Nigeria, who is trying to escape inflation in his local currency(naira) can easily save money in stable coins pegged to the US dollars. Five years ago, he did not have access to such an asset like this, it was literally impossible. DeFi also provides the first kind of globally interconnected finance space not restricted by political/geographical boundaries. Traditional financial institutions are severely restricted by these boundaries, but with DeFi, there are no nationalities. Nigerians living in the slums of Makoko can get a loan from a money pool also known as a liquidity pool created by a programmer in Hong Kong, while a Ghanian is a major contributor of capital to the said pool.

Another advantage that DeFi has over traditional finance is that it takes humans control away from finance, if you are going to be active in the DeFi space, a lot of what you will be interacting with is Smart contracts, smart contracts are pure code that has been written to carry out specific functions when some conditions are met. To explain, in simple terms, let's say you want to get a loan from a decentralized application, no human is standing at the backend of the application to approve your loans, once you deposit the necessary collateral, the smart contract releases the fund to your wallet. You will go through the whole process without having to interact with a single human, all you will be interacting with is a computer program, the computer program has been designed so long that you meet some predetermined requirements for the loan, it will be approved. This is how the majority of projects on the DeFi space work,  you have no humans controlling them, even if the creators or inventor of the project disappears, just like bitcoin did, the code keeps running and performing its function.

The ultimate winner for the DeFi space was its creation of a means of payment that was globally acceptable, free of government control and regulation, before DeFi came the globally accepted means of payment was the US dollars, and there had been a lot of bottleneck on this means of payment (more here).

The Defi space has created a lot of stable tokens that can be used for settlement and global payment accepted worldwide totally bypassing the walls, laws, and regulation that the government has built around global payment making it easy for the average person especially those in third world countries to connect into the global finance space and economy. There are a lot of other innovations happening in the DeFi space, although there are still a few hurdles needed to be overcome before it goes fully mainstream. it’s not a question of “If” anymore, it's now a question of “when”. Ladies and gentlemen,  we are standing on the verge of the future.