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The History And Future of Decentralized Finance (DeFi)

Financial freedom is a very broad term that changes definition depending on who is asked to clarify its meaning. Some consider financial freedom to have enough funds that would allow them to never work a day in their lives, others consider the term to coincide with full anonymity of transactions, while others still may relate it to an utter lack of third-party control over financial flows on a global or personal level. Whatever the definition, some have taken on the task of developing an infrastructure that would cater to the requirements of all those considering financial freedom.

Decentralized financial assets were the product of the strive to creating a system that would allow its participants to conduct transactions and make payments without government interference and control, while maintaining anonymity. Riding the crest of technologies that were advanced at the time of their inception, like smart contracts, digital currencies gave rise to a whole industry that is now living through a revival with the advent of a sector known as DeFi.

The Early Evolution of DeFi

Bitcoin was the first Decentralized Finance instrument that gave birth to the crypto industry altogether in 2009. What started out as an obscure coin for geeks to toy with is now a major investment asset with the highest volatility level ever seen in any serious asset on the market at large. Bitcoin provided the necessary infrastructure and language for the further development of decentralized finance.

But Bitcoin was quickly outstripped as an infrastructure in 2015 when Ethereum came along under the wing of its creator – Vitalik Buterin, who postulated that having coins is only half the matter. Being able to send, issue, borrow, lend and trade all manner of derivative financial instruments based on decentralized currencies was the missing element that spawned an entirely new market of projects offering every manner of service imaginable on the basis of the Ethereum network infrastructure.

It was Ethereum that gave rise to the ICO market that swept the crypto industry into the mainstream of financial affairs with such projects as Maker, DAI, and a host of DAOs fulfilling the roles that financial institutions fill on the traditional market. The ICO market of 2017 was suddenly and brutally repressed merely a year later under the weighty arm of a general industry cooldown. But the plethora of DeFi projects that emerged in the ICO era, such as Aave, Bancor, Kyber, Ren, and many others, still live on and even thrive today, providing inspiration for the market as ideological predecessors to what DeFi can become.

The summer of 2020 became the starting point for the development of the modern DeFi market as the pandemic raged across the globe and the traditional financial system buckled under its oppression. DeFi applications like lending, borrowing, market making, yield farming, insurance, and other many instruments that are usually only offered by traditional finance were developed during lockdown, giving a sigh of reprieve for the millions who had lost their jobs.

The DeFi market is now a sprawling oasis of financial opportunities with low entry thresholds and multiple instruments that allow the holders of an endless variety of native project and exchange token holders to reap the rewards of yield farming, staking, liquidity farming and many other mechanisms developed to keep the DeFi machine running.

The Future of DeFi

DeFi has already established a presence on the market of financial instruments as thousands of new users are pouring onto the arena with their funds, hoping to jump on the bandwagon and lend their combined resources to what seems to have become a shared pool of liquidity serving all and none at the same time.

On the one hand, the development of the DeFi sector is a promising avenue for the reversion of digital assets to what they were initially designed to do – provide free and unrestricted access to payment gateways and financial opportunities. Although still poorly regulated and still in its early stages of development, DeFi has the potential of contending with the global economy as a parallel system of payments and accumulation of wealth.

Over the coming years, it will not just be about how much capital flows into DeFi, but also how that capital works and how it is distributed. The threat of centralization is always present, at detriment to security and governance, and for any investor looking to invest in DeFi projects for the long term will have to take this into account.

The DeFi market is still a wilderness flooded with cash, where both opportunities and risks lurk, but the need for it is undeniable.

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