Anyone remotely connected with cryptocurrencies will have been aware of DeFi, an umbrella term to describe decentralized finance products and services. DeFi as a sector within crypto seemed to have popped out of nowhere and has become a significant player in the crypto sphere in the span of little over a year, with as much as $88 billion worth of assets locked at its all time high. But this complex, sometimes confusing set of products and services just didn’t come up one day. Its history is as old as blockchain itself.
At its very core, DeFi encompasses all services and products that offer decentralization and take out the intermediaries such as banks and money transmitters. This was exactly what Bitcoin and blockchain did. Nakamoto set up a system in which people were able to send and receive a completely digital asset as a medium of exchange, without relying on traditional financial institutions.
Ethereum brought in the next step in DeFi. A step forward, the network acts like a computer and allows anyone to create different assets and applications on it. This set off the initial coin offering (ICO) boom and along with it the first complex DeFi applications that leveraged smart contracts. However, the ICO era was marked with scams, with as much as 80% of all launches being fraudulent.
The third era, the true advent of modern DeFi, came about last year when DeFi platforms like Compound, Aave and Yearn gained immense popularity as the global economy crumbled under COVID-19 and people sought different ways to earn money. Complex smart contracts and the use of innovative options such as liquidity pools and automatic market makers brought a trustless element to services such as lending, borrowing and trading.
While the concept of a Decentralized Autonomous Organization (DAO) isn’t new, it has been a key component in strengthening the current wave of DeFi. In previous iterations, DeFi services offered the same trustless environment as any other platform today but the transparency, security and P2P aspects had only resulted in financial freedom, not control.
Native tokens were more or less mediums of exchange, going usually only as far as to offer discounts when used to pay for the platform fee. Governance tokens explored the further use of decentralizing concepts. Token holders under the governance concept are given the right to propose changes and additions to services by using their tokens as voting power.
The sense of control over one’s own financial future is perhaps the biggest boost that the DeFi environment today has had.
Modern DeFi is hardly two years old and the landscape has a lot of potential to develop and start offering more complex services and products. As the legal and regulatory sides start to catch up, there will be a lot of changes, for good and bad. However, the rising tide is unstoppable and will continue to evolve in one form or another.
My personal belief is that as mainstream industries start to leverage blockchain and DeFi in their everyday operations, they will find that there is a lot to gain.
Imagine, if you will, a corporation where DAO is implemented to ensure that security tokens bearing governance options are handed out to shareholders. A shareholder finds a new opportunity for the firm with the financial calculations showing a high potential for profits. The shareholder can simply access the firm’s platform and propose that the company invest in it. Other shareholders will have the option to look at the paperwork and decide if they want the firm to take that direction or not. If the proposal passes with a majority of votes, the opportunity is taken up.
While this whole scenario does happen in publicly and privately listed companies, the decisions are made normally during the Annual General Meeting (AGM). With a DAO, this can happen as frequently as needed. In other words, with day-to-day operational decisions being decided by the token holders, the jobs of CEOs and CFOs will become redundant. Sure, there will always be the need of figureheads to implement the decisions but the decision making will not be under their control.
But where’s the DeFi in this? The salaries and perks of the top management no longer need to be paid. Savings from these lowered expenses mean higher profits, which mean more shareholder value and eventually, higher dividends. All of this is automated, decided upon by the security token holders and the money distributed through smart contracts.
Perhaps one day, we might not even need finance or accounting departments as more automation occurs. Certainly, DeFi has to mature, along with contract security and auditing processes but I believe this lies not too far in the future.
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