DeFi Crash Course #001
Special Blockchain Edition
Hey guys, Jake here ??
This week’s edition of What Happened in Tech will be postponed and replaced with a DeFi (Decentralized Finance) crash course because honestly, that’s all I was reading up on this week.
?? Instead of learning from random web pages and YouTubers, I needed structure and a progress bar. Therefore I did the normal route of taking a DeFi Course from Coursera offered by Duke University called Decentralized Finance (DeFi) Infrastructure. (Link for those that want to get into it, it’s free, also, DM me for the full PDF) And so far, it’s great. The course lecturer Cam Harvey is informative, straight to the point with no bullshit or clickbait type of material, and boy was it a good ride. So, if you were expecting the normal news, I’m sorry to disappoint you, weekly news will be continued next week.
As for all of you that are still on board with learning about DeFi, let’s jump right in.
? One of the first questions I asked myself when I first encountered DeFi was what are the issues plaguing Centralized Finance that we had to use a decentralized system? Is there even a need? Is it a solution searching for a problem to fix? To know this, Cam dug into the history of money and how we got here.
? History of Money
?? As you know, before money, we used to purchase items with the barter system in ancient times. Exchanging the chicken you’ve grown for some ripe tomatoes and all that fun stuff. That’s certainly great, but it was inefficient. If there was chicken influenza and all your chickens died, you were screwed because the chickens were your only store of value. Without living chickens, you had no bargaining power in this economy, and also, you were poor.
Later on, this barter system was replaced by a more effective system called money. With money, you didn’t have to worry about who needed what to know your value. The primary purpose of money is that it provides a Unit of Account and a Medium of Exchange.
?? The secondary purpose of money was in the store of value and the transfer of value. The store of value allowed value to be stored. If you held your money in chickens, the chicken would eventually die, and you would lose your value.
Now onto crypto; the big question is, where does the value come from? It’s not backed by anything, and it doesn’t pay dividends, there’s no cash flow, it’ just computer programs and codes, how can it have value?
The key to this is that while it does not have directly tangible values, it does have?intangible values.
That’s right folks, intangible values does indeed bring value, and a story to illustrate this perfectly is the story of the Iraqi Swiss Dinar.
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???? Iraqi Swiss Dinar
The story of the Iraqi Swiss Dinar is one of how a disowned currency continued to be valued. It also proves that a currency can survive on intangibility alone.
The story, in short, goes like this.
?? A war started in Iraq that split the country into two parts. And after that, the US placed sanctions on Iraq, and Iraq could not facilitate imports and exports. Nothing could go in or out. This was a massive problem for Iraq as the printing of its national currency; Dinar was completely outsourced. The printing plates were outsourced to Switzerland, and the dinars' printing was outsourced to the Uk.
Once the sanctions were placed, the UK couldn't export the freshly printed dinars to Iraq and the Iraqi’s had no flow of currency. The Iraqi leader at the time, Saddam Hussein, was in hot waters and had to scramble and develop his own printing facility in Iraq to print a new currency. The idea was that an edict went out from the Central Bank of Iraq, and citizens were given three weeks to exchange the old dinars, which I'll call the Iraqi Swiss dinar, for the new dinar, which I will sometimes call the Saddam dinar.
?? This was pretty important that citizens had to transfer to the bank to exchange for the new dinar because if they didn't do this in three weeks, the old dinar would not be legal tender. It would be worthless. Some people did this in the South where Saddam controlled, but this didn't apply to the North. The North was separated. There was no Central Bank of Iraq that had any influence there.
Basically, what happened was that the Kurds in the North just decided to continue using the Iraqi Swiss dinar. To be clear, the dinar has got no value, according to the Central Bank of Iraq, it’s technically not backed by anything. But it was used as if it did have value.
?? Now, this is especially interesting as while Saddam Hussein was in the South, he was desperate for money to pay for various things, so he decided to do the one thing that leaders with no economic backgrounds do, he abused the money printer and churned out an influx of cash to pay for stuff. They just kept on printing the new dinars. At some point, the exchange rate was 300 of the Saddam dinars for one of the old unbacked Iraqi Swiss dinars.
The point I'm making here is that it is possible to have value even though the currency isn't necessarily backed by anything. This is a recent example, but it's not the only example in history.
The Iraqi Swiss dinar continued to be used, and it had value, even though technically, it was unbacked by the Central Bank of Iraq. There are many other examples in history. Why would a disowned currency continue to be valued? One possibility is that the Kurds had a demand for currency as such. Whatever bits of colored paper already happened to circulate in northern Iraq would, perhaps by virtue of necessity and tradition, continue to be used despite their lack of credit.
?? Another explanation for the continued positive valuation of Swiss dinars is that Kurds anticipated that their disowned dinars were likely to be reclaimed by a future central bank. For instance, if northern Iraq were ever to be made sovereign, a new Kurdish central bank would likely adopt the Swiss dinar as their liability.
? Problems of Centralised finance:
From what’s been observed over the past decades of Centralized finance being in operation we can effectively conclude that it is not a perfect system. There are 5 visible holes in the system which are as follows:
The current banking system is first off highly concentrated. Bank bailouts are the results of one of the biggest flaws in having a centralized point of control. In finance, if the main system fails, everyone that is connected within the system will also be dragged down with it.
?? Not only that but there is also limited access to funding for individuals and small businesses, which are the backbone of the economy. If let’s say a small business has a projected ROI of 30% of their businesses and banks reject it, the small business owner would either finance it themselves with a credit card that may have a high-interest rate or just not start it altogether. This renders the disposable income of the individual low, in turn, would be bad for the economy.
The results of this mean that there are tons of missed growth opportunities. and the economy cannot flourish as it should with these issues holding it back.
Opacity is also another problem that bubbled up during the stock market bubble crash. The financial institutions were all Silo’d and only a few had the access of connecting the dot to what was about to happen. And that ultimately led to the bubble bursting.
In a month or so, I’ll cover the next edition of Defi Crash Course so till then, byeeee.
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3 年The story of Iraqi swiss dinar is pretty cool!