The Seeds of DeFi: How Bitcoin Revolutionized the Financial Industry
Some major changes from the previous stage may only be realized or deeply understood in the next stage.
Today, as we stand in the thriving context of DeFi, looking back, this movement that runs on blockchain technology, is protocol-driven and computation-based, was seeded or laid the foundation from the very beginning.
Let’s first imagine the situation in traditional finance: the government controls the right to issue currency, accounting and especially auditing are highly complex, resulting in the need for a very large group of bankers and investment managers, creating high barriers to entry and huge process costs that are difficult to estimate… Power, capital, and professional barriers control financial behavior, making it very difficult for ordinary people to participate.
If we narrow down this imagination and evaluate it solely based on the number and cost of human resources, you will find that DeFi financial platforms such as Uniswap, MakerDao, Curve, Aave, and Pando still have a very small total of human resources. Uniswap has dozens of employees, while Pando has only a few; whereas, a single company like PwC has hundreds of thousands of employees. In a sense, traditional finance must have very high process costs to support countless large and small companies like this.
So looking back, from a financial perspective, the emergence of Bitcoin brought about two major changes: one in currency and the other in accounting.
The changes that occurred in the currency field are well-known. Bitcoin is an experiment in “equal rights” of currency issuance under the siege of fiat currency, and this experiment has been hugely successful. It enables “currency” to be based on consensus, with blockchain technology ensuring its long-term operation. Subsequently, Ethereum further lowered the barriers to “currency issuance”. We found that the object of finance, “currency”, has changed. It has been “digitized”, and algorithms and technology can now participate in it. The “Bitcoination” of currency is the foundation of new finance.
With the existence of currency and transactions, accounting becomes crucial. Another aspect of Bitcoin is its “open and tamper-proof ledger”, which is particularly important for new finance because it solves the problem of trust, which is “human”. Bookkeeping, auditing, and other accounting activities can be left to technology so that barriers and costs can be greatly reduced. Only when “computational accounting” emerges, can humans have the opportunity to create a completely new financial system.
Let’s take another look at the traditional and vast field of accounting. Its main tasks include bookkeeping, processing vouchers, classification, calculation, preparation of financial statements, tax reporting, auditing, etc. You will find that these are all actions based on the “ledger.” However, with the introduction of the “public and tamper-proof ledger,” all of these actions can be performed by code.
Now, it is the era of computational accounting. So actually, Bitcoin provides another major change: a revolution in accounting methods, which should be handed over to code.
The present and future have been established since the moment Bitcoin appeared: the human cost of new finance should be greatly reduced, and the foundation of new finance should be code and computation. Bitcoin not only provided a new object for DeFi — cryptocurrency but also opened up a new way for DeFi — computational accounting. Ethereum has continued and innovated well in these two aspects, with a more thorough involvement of computation, making the concept of DeFi clearer.