Expository about DeFi, Bitcoin and Ethereum.

Often times I get asked "what exactly are DeFi, Ethereum and Bitcoin all about?"

Let's get down to the story

Humanity came about this great innovation that is said to change our world forever. The world of finance is experiencing a revolution; with Decentralized Finance(DeFi) changing the way we think about trade, money, and finance.

In the course of human history, finance has centralized itself around few institutions like the banks and commercial exchanges and an 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 have to go to a bank. Most of the trade and finance in our modern world revolves around these institutions and any problem with them can cause 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,”

What Satoshi was building was a form of online cash that could be transferred without the need of intermediaries like banks, payment processors and the likes. A 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 unusual!

This innovation was first caught on slowly 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 exceptional 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 or central server managing the whole thing?

Imagine a ledger or record book in a bank, where entries are made based on the transaction done. In a central traditional 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 or a financial institution control the ledger, it's distributed across different nodes (built on a 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 or 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. By this way, bitcoin broke the monopoly that the financial institutions have long had as an intermediary in the finance world. Although bitcoin had its issues; being too narrow in utility to fully challenge the current financial system as the only thing you could do with the bitcoin blockchain was to send bitcoin from one wallet to another. And you will agree with me that the world of finance is more complex than just sending money from a party to another as this was basically the only function the Bitcoin blockchain had.

Today, we have loans, derivatives, securities interests, exchanges, as part of the financial ecosystem, that we didn't see at the inception of bitcoin.

In 2013 came Ethereum by the programmer (Vitalik Buterin) who proposed a solution to the Bitcoin narrow utility problem, developing a decentralized ledger (blockchain) with a general-purpose blockchain on which you could build anything you want instead of a single function.

The Ethereum blockchain is like a foundation, on which you could develop decentralized applications with 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 design of Decentralised Finance (DeFi) and set to shapen the world and the future to come.

Thank you for reading

Victorfela.