By Andre Cronje
Preface: Why does human society need finance?
Before we get into that, let's first ask a question: Why do we need finance? Before there was any money, there was barter. I raise chickens, you raise wheat. I give you chickens, you give me wheat. One year, my chickens don't do well, but I still need wheat, so I promise to give you more chickens next year. I owe you (an IOU). Now, maybe you don't need more chickens, but your neighbor does, so you can trade this IOU for something else. In its most basic form, this is what money is - a standardized IOU that anyone willing to accept agrees has some established value.
Eventually, we began to measure everything in terms of these IOUs.
Now, I had a bunch of IOUs and I started to worry about being robbed, so I needed a safer place to store them. Thus, the earliest banks were formed (initially, churches kept the books of these IOUs).
A respected man in the community wanted to start raising cattle, so he asked the church for some IOUs to start his farm. The church agreed, but he needed to pay more IOUs later, which was the interest he had to pay. To secure the IOUs, the man needed to put up the deed to the land he had purchased as collateral. The community members who deposited the IOUs with the bank were satisfied because their IOUs had increased, and the respected man was grateful because it enabled him to start his business.
1. What is the core of finance?
Finance, at its core, has always been about empowerment and putting idle assets to work. Due to fraud, crime, and the evolution of society, it has become increasingly difficult to tell if someone borrowing money is a "respectable person." In today's almost dystopian world, we are all reduced to a credit score. This score determines whether we are a good financial candidate. If you are new, you are a "thin file" in credit bureau terms, which means there is not enough data to judge you, meaning it is difficult to get a loan, and even if you qualify, the interest rate will be very bad. You also need to have existing relationships.
2. DeFi: Neither Care nor Judge
This gets back to why we need decentralized finance (DeFi). DeFi doesn't care and doesn't judge. Everyone gets treated the same according to the rules of the system, which are open and transparent for anyone to see. A traditional bank rejected your mortgage application? You probably have no idea why. A loan rejected in DeFi? You know exactly why. Interest (or yield) is one of the purest forms of income besides labor and goods. There will always be someone who needs capital to start a new venture or needs some help to get through tough times. This type of income is infinitely scalable and pure, it doesn't rely on any false incentives, it doesn't rely on any external factors, it's just a simple supply and demand business.
3. Barter is still the core of business
The next form is barter, going back to what we mentioned earlier, I have chickens and you have wheat. In today's connected world, barter is still at the heart of everyday commerce, but it can be difficult to find a counterparty, or it can be difficult to find what you need. This is why general markets come into existence, a place where everyone can come together once a week to sell and exchange their goods. An automated market maker (AMM) is a barter platform, just like in a marketplace you need to pay a small fee to sell your goods, in an AMM, the provider also charges a small fee. Again, this is a pure form of income (or yield). As long as there are people willing to sell and people willing to buy, it is infinitely scalable. In DeFi, you don't need to be an accredited investor to participate in this market, you don't need to live in New York or work on Wall Street, there is no black box or brokers, what you see is what you get. Take a look at our seven largest industries: Life & Health Insurance Oil & Gas Real Estate Pension Funds Auto Sales Direct Insurance Commercial Banks
4. DeFi eliminates obstacles and barriers
These are some of the largest industries in the world, even if most people can’t participate in them. DeFi removes all of these barriers and allows anyone who is willing to try to participate. This is probably the most important building block of any growing economy. Everything else derives from it. Trading and lending are key to all of the above industries. Sure, there are variants where these industries are overwhelmed by false incentives, inflated yields, unsustainable revenues, but that’s true in either the traditional or decentralized versions. This in itself doesn’t fundamentally take away from 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 so much more to come. Until all seven of the above industries are on-chain, freely accessible, transparent, and open to everyone, we have a lot of work to do. All humanitarian efforts happen when we as a collective have enough to share. And enough sharing can only happen through DeFi.
