"King of DeFi" AC's new work: Why do we need DeFi?
DeFi is the core building block of a decentralized society, and this is just the beginning; there is much more to come in the future.Author: Andre Cronje
Introduction: Why Does Human Society Need Finance?
Before we delve deeper, let's ask a question: why is finance necessary? Before any currency existed, the earliest form of trade was barter. I raise chickens, you grow wheat. I give you chickens, you give me wheat. One year, my chickens didn't do well, but I still need wheat, so I promise to give you more chickens next year. I owe you (i.e., an IOU). Now, perhaps you don't need more chickens, but your neighbor wants them, so you can exchange this IOU for something else. At its most basic form, this is the essence of money—a standardized IOU that anyone willing to accept agrees has a certain established value.
Eventually, we began to use these IOUs to measure everything.
Now, I have a pile of IOUs, and I start to worry about being robbed; I need a safer place to store these IOUs. Thus, the earliest banks were formed (initially, churches kept the ledgers of these IOUs).
A respected person in the community wants to start raising cattle, so he borrows some IOUs from the church to kickstart his farm. The church agrees, but he needs to pay back more IOUs later, which is the interest he has to pay. To secure the IOUs, this person needs to put up the deed to the land he buys as collateral. Community members who stored their IOUs in the bank felt satisfied because their IOUs increased; this respected person was also grateful because it allowed him to start his business.
1. What is the Core of Finance?
The core of finance has always been about empowerment and making idle assets work. Due to fraud, crime, and the evolution of society, it has become increasingly difficult to judge whether the person borrowing money is a "respected person." In today's almost dystopian world, we are all reduced to a credit score. This score determines whether we are good financial candidates. If you are a newcomer, you are a "thin file" in credit bureau terms, meaning there is not enough data to assess you, making it hard to obtain a loan, and even if you qualify, the interest rates will be terrible. You also need to have existing relationships.
2. DeFi: Neither Caring Nor Judging
This brings us back to why we need decentralized finance (DeFi). DeFi neither cares nor judges. Everyone is treated equally based on the system's rules, which are open and transparent for anyone to see. Did traditional banks reject your mortgage application? You might not even know why. In DeFi, if a loan is denied, you know exactly the reason. Interest (or yield) is one of the purest forms of income aside from labor and goods. There will always be someone needing capital to start a new venture or needing some help to get through tough times. This type of income is infinitely scalable and pure; it does not rely on any false incentives or external factors; it is simply a straightforward supply and demand business.
3. Barter Remains at the Core of Business
The next form is barter, going back to what we mentioned earlier: I have chickens, you have wheat. In today's interconnected world, barter remains at the core of everyday business, but it can be challenging to find a trading partner or to find what you need. This is why general markets began to exist, a place where everyone can gather weekly to sell and exchange their goods. Automated Market Makers (AMMs) are a platform for barter; just as you need to pay a small fee to sell your goods in a market, in an AMM, providers also charge a small fee. Similarly, this is a pure form of income (or yield). As long as someone is willing to sell and someone is willing to buy, it has infinite scalability. In DeFi, you do not need to be an accredited investor to participate in this market; you do not need to live in New York or work on Wall Street, and there are no backroom deals or brokers—what you see is what you get. Look at our seven largest industries: life and health insurance, oil and gas, real estate, pension funds, auto sales, direct insurance, commercial banking.
4. DeFi Eliminates Barriers and Thresholds
These are among the largest industries globally, even though most people cannot participate in them. DeFi eliminates all these barriers, allowing anyone willing to try to participate. This could be the most crucial cornerstone of any growing economy. Everything else derives from it. Trade and lending are key to all the industries mentioned above. Of course, there are some anomalies where these industries are flooded with false incentives, inflated yields, and unsustainable income, but this is true in both traditional and decentralized versions. This does not fundamentally strip 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 come. Until all seven of the aforementioned industries are on-chain, freely accessible, transparent, and open to everyone, we have a lot of work to do. All humanitarian efforts occur when we, as a collective, have enough to share. And enough sharing can only be achieved through DeFi.
