2008 was a devastating year for the world economy and S&P 500, the benchmark index for the American stock market was down approximately 58% from its high in October 2007. With great power comes great responsibility and the power was too concentrated into the hands of very few banks. The financial crisis of 2008–09 brought the global economy and investors to their knees.
Following the crisis, a new type of currency, Bitcoin was created in 2009. It was a peer-to-peer, electronic cash system that was decentralized, built on Blockchain, and gives power to the user. It was created by a person, team, or an organization, well, no one knows but it comes with a pseudonym, Satoshi Nakamoto.
In 2015, a team of developers prominently, Vitalik Buterin, Charles Hoskinson, Gavin Wood, and others created a blockchain called Ethereum with its native cryptocurrency Ether, which was a Smart-Contract-based platform. In a nutshell, you were able to build Dapps or Decentralized applications on top of Ethereum with its programming language called Solidity.
They are self-executing computer programs or contracts with the terms of the agreements between buyer and seller being directly written into lines of code. You can build whole applications, ecosystems, etc. on them.
DeFi stands for Decentralized Finance, well, it’s non-custodial finance. In traditional finance, let’s suppose, to invest in a particular type of asset, you first have to deposit your money into a bank and then sent it to a broker. A central party holds your assets and money for you, they can restrict withdrawals, locations, deposits, etc. Well, in DeFi, none of this happens and there are no restrictions on anything and the only person that hold your assets and fund is you.
- Defi runs on smart contracts and they are exploitable or in simple terms, “Hackable”. Hackers can exploit and can transfer all the money in a contract to their wallets.
- If a user forgets or loses the private key of their wallet, then their assets and funds are lost forever and cannot be recovered.
Ethereum changed the course of Blockchain technology and introduced DeFi to the world. DeFi is one of the most important innovations of this century which gives power back to the user. The future of DeFi is bright but it comes with its problems and drawback. In the next part, we will talk about DeFi innovations and their use-cases.