When did DeFi start?

DeFi is an invention of the crypto era, built on a decentralized network powered by blockchain technology and cryptocurrency. The term 'DeFi' itself was coined in 2018.

Some people believe that Bitcoin (the first widely adopted cryptocurrency) is the pioneer of DeFi because it enables global peer-to-peer transactions. Although Bitcoin makes peer-to-peer payments possible, it is only a small part of the DeFi world. In fact, DeFi as we know it today began with the Ethereum blockchain.

Technologies that Power DeFi

In 2015, the Ethereum network launched its famous "smart contracts," which are like specialized programs on the blockchain. Through this innovation, Ethereum has become the first "programmable" blockchain that can do more than just peer-to-peer transactions. By layering and combining smart contracts (somewhat like stacking LEGO bricks), developers can build entire decentralized applications ("DApps") on the blockchain instead of company owned servers.

With this innovation, developers have started building various DeFi DApps and protocols to provide financial services such as lending, trading, and derivatives for the cryptocurrency market. In the following years, DeFi will become very popular on the Ethereum network. Users can ultimately directly control their finances without relying on the government or banks. Following in the footsteps of Ethereum, there are now many blockchains with similar programmability and their own thriving DeFi ecosystems.

Traditional financial issues

You may wonder why someone would want to use DeFi tools instead of the ones available in traditional finance - after all, traditional finance has more rules, regulations, and customer protection, right? In fact, traditional financial infrastructure makes it more difficult for people to access financial services and requires them to trust (usually) less trustworthy institutions.

Unable to access financial services

Financial institutions establish their own rules and regulations in the name of 'safety'. But the red tape and bureaucratic style of banks and intermediaries often put people at a disadvantage rather than helping them. Traditional finance is full of economic and geographical limitations, which prevent people from using financial services.

Think about savings accounts that reward higher account balances with higher interest rates, charge fees for bank balances below the minimum, or require minimum transaction amounts. Many regions are plagued by predatory lending models that exploit those who want to borrow money. Even transferring funds from one bank account to another will incur service fees. Trying to transfer money abroad, you will find that intermediaries have set more restrictions and fees.

Traditional finance is centralized, and powerful institutions make money by charging service fees to users - there are not many viable alternatives. But it's not just about the cost.

The opportunities to enter financial markets such as stocks and derivatives are decreasing and gradually dominated by the wealthy. For example, in the United States, the top 10% of households with net assets own over 85% of stocks; The bottom 50% of households own less than 1% of stocks. In many countries, people are unable to even enter the stock market. All of this indicates how 'closed' the global economy is actually.

Need to trust big banks

Traditional finance also relies on trust. For example, when you deposit money into a bank, you trust that the institution will ensure the safety of your assets and you can decide to withdraw it on your own. However, once you deposit, the bank will use the money in ways you may not like. In fact, your account balance is just a number on the screen - at any given time, a certain percentage of that balance will be lent to other clients, used for investment, etc. In emergency situations, it is not uncommon for customers to withdraw collectively, a phenomenon known as "bank run" (which can deplete the bank's entire cash reserves).

Traditional finance is outdated, slow, and built on a system of centralized control and unequal access that benefits the wealthy the most. This is an industry that can benefit from decentralization of power.