AC New Article: Why DeFi is the key to the future?

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ODAILY
08-28
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Original author: Andre Cronje

Original translation: TechFlow

Before we dive in, why are we talking about finance in the first place?

Barter existed before any currency existed. I raise chickens and you grow wheat. I give you chickens and you give me wheat. One year, my chickens don't do so well, but I still need wheat, so I promise to give you more chickens next year. I owe you an IOU.

Maybe you don't need more chickens, but your neighbor wants them, so you can trade that favor for something else. In its most basic form, this is currency, a standardized favor that anyone willing to accept agrees is worth a given value. Eventually, we start measuring everything in terms of favors.

So now I had a pile of favors and I started to worry about being robbed, and I needed a safer place to store them. So the first banks appeared (originally churches storing the favors' ledgers). A respected man in the community wanted to start raising cattle, and he asked the church to loan him some favors so he could start his farm. The church agreed, but he needed to pay back more favors than he borrowed, which was the interest he had to pay. To secure the favors, the man needed to put up the deed to the land he had purchased as collateral. The community that stored the favors in the bank was grateful because they now had more favors, and the respected man was grateful because it enabled him to start his business.

Finance at its core has always been about empowerment and putting idle assets to work. At some point, due to fraud, crime, and an evolving society, it became increasingly difficult to tell if someone requesting funds was a "respectable person." In today's almost dystopian world, we are all reduced to a credit score. A number that determines if we are a good financial candidate. If you are new to the system, you have what is called a "thin file" in credit bureau lingo, meaning there is not enough data to judge you, which means it's difficult to get a loan, and even if you qualify, the interest rate will be terrible. You also need to have an existing relationship.

This brings us to the question of why decentralized finance (DeFi) exists. DeFi doesn’t care, DeFi doesn’t judge.

Everyone is treated equally according to the rules of the system , and those rules are open and transparent for everyone to see. A traditional bank turned you down for a home loan? You might not even know why. DeFi turned you down for a loan? You’ll know exactly why.

Interest (or yield) is one of the purest forms of income, outside of labor and commodities. There will always be someone who needs capital to start a new business, or someone who is in trouble and just needs some help getting through the winter. This form of income is infinitely scalable and pure, it doesn't rely on any false incentives, it doesn't rely on any external factors, it's just a simple business of supply and demand.

The next form is barter, going back to our first paragraph, I have chickens, you have wheat. In today's connected world, barter is still at the core of everyday business, but finding a counterparty can be difficult, or finding what you want can be difficult. This is why general markets come into existence, a place where people come together every week to buy, sell and exchange goods. An automated market maker (AMM) is a barter platform, just like in a market you need to pay a small fee to sell your goods, in an AMM, the provider charges a small fee. This is also a pure income (or revenue). As long as there are people willing to buy and sell, it can be infinitely scalable.

In DeFi, you don’t need to be a qualified investor to participate in this market, you don’t need to live in New York, you don’t need to work on Wall Street, there are no backroom deals or brokers, what you see is what you get.

Take a look at the world's seven largest industries:

  • Life and Health Insurance

  • Oil & Gas

  • real estate

  • Pension Funds

  • Car Sales

  • Direct Insurance

  • Commercial Banks

These are the largest industries in the world, and even though most people can’t participate in them, DeFi eliminates all of that and allows anyone willing to try to participate. This is probably the most important cornerstone of any economic growth. All others flow from this. Trading and lending are the cornerstones of all of the above industries.

Sure, some versions are distorted by false incentives, inflated returns, unsustainable revenues, but that’s true for traditional or decentralized versions. That in itself doesn’t fundamentally take away the beauty of pure, transparent, and fully democratized access.

DeFi is a core building block of a decentralized society, and this is just the beginning, there is much more to do. Until all seven industries mentioned above are on-chain, fully open, transparent, and accessible to everyone, we still have more work to do.

All humanitarian efforts happen when we as a collective have enough to share. And having enough to share can only be achieved through DeFi.

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Disclaimer: The content above is only the author's opinion which does not represent any position of Followin, and is not intended as, and shall not be understood or construed as, investment advice from Followin.
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