The world has become no stranger to financial crises ignited by big banks. Yet despite reckless actions from powerful figures in the world of traditional finance, it seems like the public are always the ones who end up losing.
As a result, a widespread appetite has festered for a way to carry out financial services without allowing traditional financial institutions to continue controlling our lives.
Here’s what the DeFi revolution is setting out to do.
The decentralized finance (DeFi) revolution is a movement that aims to restructure power within financial systems. At its core, this movement intends to democratize the way that financial systems operate. Its goal is creating a more even playing field for the broader majority of people.
Prior to the arrival of the DeFi movement, traditional financial institutions have been the only practical way to exchange value in the digital age. Buying or selling any good or service has long relied on middlemen such as banks in order to allow transactions to occur between two or more parties.
Decentralized finance, on the other hand, is about using emerging technology to allow transactions to occur without the involvement of any middlemen. In a true decentralized network, participants are simply free to transact with one another on a peer-to-peer basis.
While proposals and prototypes of decentralized currencies had long existed, it was the launch of the Bitcoin network in 2009 that is credited as the birthing point of this movement.
Bitcoin, running on blockchain technology, was the first widespread decentralized currency to allow people to transact without the need for intermediaries. Today, people are able to send or receive digital currencies without any bank or middleman being involved at all.
In the years since Bitcoin’s arrival, the DeFi revolution has evolved to be so much more than any one cryptocurrency. Today, the world of decentralized finance includes thousands of digital assets and projects, entire lending platforms, and billions of dollars in value.
Before we get into the scale of this movement, however, let’s explore why its proponents believe a DeFi revolution is long overdue.
Proponents of the DeFi revolution believe that it is necessary to take power away from banks and traditional financial systems. They believe that this power is better suited in the hands of everyday people.
While traditional banking has long stood as an undisputed cornerstone of our contemporary lives, the public’s ability to trust in these institutions has severely diminished over time.
Largely, the loss of faith in traditional financial institutions is the result of several financial crises. DeFi proponents believe that these crises have been spurred on by both central banking authorities and major commercial banks.
The most illustrative example of this, the Global Financial Crisis, is directly tied to the origins of the very first Bitcoin transaction that ever took place.
When the Bitcoin network went live on January 9, 2009, its still-anonymous creator(s) stored a hidden message in the first-ever Bitcoin transaction. This message, permanently contained in Bitcoin’s blockchain, can be converted to read:
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”
This message serves as a permanent reminder of why the DeFi movement was born. In the wake of the 2008 financial crisis, many people were outraged at the role that big banks played. Not only had they ignited the crisis, they had then been deemed “too big to fail.”
As such, the harshest consequences of this crisis were not felt by the rich. Rather, these consequences were endured by the everyday people who found themselves struggling financially for reasons that were in no way their fault.
With these events fresh on the minds of many, the need for a decentralized alternative to traditional financial institutions had never seemed more apparent. Thus, this was a perfect opportunity for digital peer-to-peer spending to finally take form.
In the years since, a litany of global events have continued to reaffirm a desire for redistributing power in financial systems. This year, the reckless management of several banks once again spurred their own significant crisis.
Of course, the need for a DeFi revolution extends beyond looking for a way to take power away from major banks. Decentralized finance has seen a wide variety of use cases in lending, remittance, digital stores of value, censorship resistance, and even just a personal desire for people to manage their own finances.
In its earliest days, decentralized finance was an incredibly niche topic—certainly not one that had earned its own snappy syllabic abbreviation.
In 2023, however, it is hard to interact with the intersection of finance or technology without stumbling upon the word DeFi.
Back in the first year of the movement, the concept of being able to buy a physical good with an entirely-digital currency seemed like a pipe dream. So much so, in fact, that the first purchase of a pizza using bitcoin back in 2010 became its own cult holiday: Bitcoin Pizza Day.
Today, it is hard to even understand why this was once such an accomplishment. The existence of crypto ATMs around the world, and many platforms and services accepting decentralized financial payment options, has made these kinds of transactions trivial.
In addition, one country even became the first in the world to recognize Bitcoin as legal tender back in 2021.
According to Statista, revenue in the DeFi market is projected to reach $16.96 billion USD this year and is projected to reach as high as $34.6 billion USD by 2027.
DeFi has gone from an idea to an almost unignorable part of the world today. But with this popularity, many feel that the industry has become muddied.
When an industry becomes as profitable as DeFi, it can quickly become a breeding ground for get-rich-quick schemes, scams, and projects that muddy the waters of the movement’s original purpose.
According to reporting by CoinTelegraph, over $204 million USD was lost in DeFi hacks and scams in just the second quarter of 2023 alone.
As we have seen in many other industries, DeFi’s surge has brought with it a rise in bad actors and sketchy projects. In order to combat this, proponents of the DeFi revolution often look at the core features of a project to determine its true intentions in the DeFi landscape.
The biggest ‘red flag’ in the eyes of DeFi proponents is projects that claim to be part of the decentralized finance revolution while having their own obfuscated form of centralized governance. For instance, a project might let its owners hold admin keys, mine the currency before everyone else, use centralized oracles, and/or make unilateral decisions on behalf of the community.
When a project is not truly decentralized, it runs contrary to the purpose of the DeFi movement.
In a landscape that was fundamentally designed to overthrow the need for financial intermediaries like large banks, allowing project teams or founders to have full control creates its own array of issues. Projects that do not give this power wholly to their users risk having the same baggage that has long burdened the world of traditional finance: letting a small group have power over everyone else.
True DeFi projects need to be decentralized.
Proponents of the DeFi revolution argue that in order to commit to being decentralized, legitimate DeFi projects should not give anyone admin keys and should function through the use of decentralized oracles. In addition, they should operate permissionlessly and transparently.
By upholding these core features, DeFi projects can stay true to the first principles of crypto and blockchain.
The overall story of the DeFi revolution is still young relative to the traditional forms of exchanging value that have cemented themselves in our lives. While there is no way to know what the future has in store for the landscape, a few things are clear: DeFi is more accessible than ever and has become increasingly unavoidable.
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Connor is a US-based digital marketer and writer. He has a diverse military and academic background, but developed a passion over the years for blockchain and DeFi because of their potential to provide censorship resistance and financial freedom. Connor is dedicated to educating and inspiring others in the space, and is an active member and investor in the Ethereum, Hex, and PulseChain communities.