In the second part of the series, I’ll walk you through the events of 2008-2009, which were caused by American investment banks and that almost crippled the world economy. It would be this event that births the idea of decentralized finance. You will learn why and how other countries, especially the world powers, have huge influence over developing economies, and why DeFi is the key to liberation.

The Banks and Traditional Finance

The banks are the largest financial institutions on earth, with the national central banks heading the banking and finance sector in a nation. Now, the banks are in charge of facilitating payments, accepting deposits and withdrawals, offering loans to individuals and organizations, and even governments (though this should not surprise any Nigerian, seeing as our government has an affinity for borrowing money, well, it’s closer to an addiction than it is an affinity).

Banks would have been ideal financial institutions if not for two factors; humans and idealogy. Yes, humanity has taken a perfectly well-grounded idea and made it the scourge of the common man. Politics, corruption, human error and other vices and behavioural lapses in human nature have led to the banks and the entire traditional finance sector becoming a “computer in need of an immediate and urgent reboot”.

Banks were a very handy and helpful institution till human error, politics and corruption turned the entire sector on its head. Bankers became too greedy and created numerous means of siphoning money from customers, a terrible situation we still suffer to this day, politicians became too drunk on power that they devised policies that negatively impacted the very citizens they swore to uplift.

Hopefully, you will remember the global economic crisis of 2008/2009. This crisis highlighted everything that was wrong with centralized finance. Give a few (the banks) an unchecked amount of power and watch the world crumble. Boy did the world crumble! American banks had stepped into the mortgage ratings business and were offering rated mortgages as financial instruments to clients. Unknown to people, what they were really buying was fraudulent low-class garbage which was completely worthless. Common citizens had taken loans out to buy houses, but could no longer repay. Credit defaulting became rampant which led to a lot of banks running into bankruptcy once those instruments began to fail and the economic collapse began.

Many Countries around the world had considerable investments in these investment banks, especially AIG, and their failure almost toppled the economies of these invested foreigners.

P.S. For more on the financial crisis of 2008/2009, I highly recommend you watch the movies “The Big Short” and “Too Big to Fail”. It’ll be the best way for you to truly understand the gravity of the economic collapse

DeFi seeks to create a better financial framework, made possible thanks to the introduction of the internet and blockchain technology, particularly in three critical areas of the financial system:

“Power corrupts, but absolute power corrupts absolutely!’ This is exactly what happened, the banks grew sinfully greedy and became like the current political system of our beautiful nation, disgustingly corrupt. They were using the funds of their clients to make themselves rich while putting all the risk on their clients. Transparency and truthfulness became abstract ideals and realizations to the top brass of these banks. I won’t give them all the credit for such a magnanimous mess, credit is also due to the credit rating agencies (pun intended) that gave out false ratings to financial instruments these banks were offering, just so they could also make a quick buck and keep the banks away from their competition. Hence, they helped destroy the lives of millions of Americans, with the US government giving them only a “slap on the wrist”. Think I’m lying? Go research about how many people were sentenced to imprisonment for their role in such a disaster. Instead, some other banks got bailout money from the government that should have prosecuted them.

DeFi is totally different. It solves the problem of transparency by creating public ledgers of past transactions that can be seen, reviewed and audited by absolutely anybody, while still keeping a form of anonymity for the participants in that transaction. For example, you can go to etherscan right now and view transactions that have taken place on the Ethereum network without even knowing who did it, pure transparency.

DeFi smart contracts are fully programmed codes, you cannot cheat the codes as they treat every participant equally without discrimination. The codes run exactly as they are programmed to, and any flaws quickly become evident as it is open for public scrutiny, thus no way to write faulty codes that be found out unless the programmers are shady and intend to rug pull (steal all the liquidity, or money, put into the DeFi protocol by investors) by keeping a backdoor open for themselves. In that situation, it’s not the codes that failed but man’s corruption.

In totality, DeFi simply removes all unnecessary middlemen while still maintaining anonymity and no censorship of people’s money, allowing anyone to have access from anywhere.

Now that you understand what defi is and why it is necessary, we will get into the third part of the series which focuses on the 3 problems decentralized finance was built to solve.