Evolution of Money

The journey of money began with the barter system, where goods were directly exchanged. However, this system had significant drawbacks, including the challenge of finding matching needs and the lack of a common value measure.

The barter system had issues with finding equivalent goods for trade and indivisibility as an issue.

The invention of money revolutionized trade by providing a universal medium of exchange, enabling easier transactions and value storage, which catalyzed long-distance commerce, allowed for more complex economic systems, and encouraged specialization. As trade flourished, it dramatically enhanced people's lives by increasing access to diverse goods and services, fostering innovation, and improving overall living standards.

Initially, currencies were backed by precious metals like gold, providing inherent value. However, modern economies have shifted to fiat currencies, which are not backed by physical assets. Instead, their value comes from government decree and economic faith, allowing for more flexible monetary policies but also introducing the potential for inflation through unlimited printing.

Currently, money is taking a digital form; we are not using actual cash for purchases and rely mostly on cards or UPI systems powered by central banks and commercial banks.

This evolution of money from physical bartering to abstract financial instruments set the stage for today's complex global economy and emerging decentralized finance systems.

Current Financial Institutions

We all depend on a few financial institutions for making payments, saving money, and handling any tasks related to money.

Governments provide us with identification; in India, we have the Aadhaar card, and in the US, we have the Social Security Number (SSN), which was initially used for the Social Security program but has since expanded to identify individuals across the US.

Central banking agencies like the Reserve Bank of India and the Federal Reserve Bank have been the central system for controlling their own fiat currencies and hold the sole monopoly to print currency. These central banking agencies define the policies for the economies we operate in.

Commercial banks are the final link we use, providing us with accounts for saving, spending, and obtaining loans. They also facilitate payments within specific regions and can handle cross-border transactions. When we engage in international trade, they facilitate and guarantee transactions between merchants.

As we can see, governments provide us with identification, while banks facilitate the storage of money and enable payments between individuals.

Blockchain Revolution

Here we can see a pattern across the globe: as people place their trust in these agencies, this trust gives the agencies the power to act and implement rules and regulations, leaving us with no control over the agencies' actions.

Satoshi Nakamoto, the pseudonymous creator of Bitcoin, recognized this pattern of centralized trust and sought to disrupt it. By introducing blockchain technology and cryptocurrency, Nakamoto aimed to challenge the established financial system and return control to individuals. The core idea was to decentralize trust, spreading it among network participants rather than concentrating it in centralized institutions. Through the use of cryptography, consensus mechanisms, and transparent, immutable ledgers, Nakamoto created a system where trust is placed in mathematics and code rather than in corruptible human institutions.

Bitcoin served as an example of decentralizing the payment system. Later evolutions of blockchain introduced smart contracts.

Smart contracts, self-executing agreements with predefined rules, further extend this concept by automating trust. This paradigm shift eliminates the need for intermediaries and empowers individuals to have direct control over their assets and financial interactions. By doing so, Nakamoto's vision offers an alternative to the traditional system, where trust is distributed among peers and encoded in transparent, verifiable protocols, potentially freeing people from reliance on centralized authorities and their often opaque decision-making processes.

In this DeFi series, we won't dive deep into the technical aspects of blockchain, but to grasp the concepts discussed, just know that blockchain is a distributed, immutable ledger designed to spread trust among individuals.