The Foundation of Decentralized Finance

A Primer on the Foundation of Decentralized Finance

2

 

When it comes to decentralized finance (DeFi), many people don’t get the reasons why it should as an industry exists in the first place. The truth is that for the better part of more than two and a half decades, we have all become comfortable with the existence of centralized financial legacy systems.

These centralized financial systems and their appropriate technologies have been the bane for most of the software infrastructure and innovations that form this new exciting world of financial technology that we have all fallen in love with. 

Decentralized finance, on the other hand, has in the past few years come to the limelight. This has created a new paradigm that the rest of the world is still trying to understand. To get how the concept of decentralized finance came to be, one must understand a little-known accounting concept that will come to rule the financial world: the triple-entry accounting concept.

Decentralized Finance has a little-known Foundation

We are all familiar with the double-entry system. We have the debit section and the credit section. In double-entry accounting, every entry in the double-entry system must be balanced hence the term: “balancing the books”. Triple-entry accounting systems work differently. 

The Double-entry accounting system as we know it was invented by Plinius the Elder in about 70 AD. However, the entry system in terms of modernization has its roots from a Florentine Merchant named Amatino Manucci around the 13th century. We all know Florence for its love of trade and some of the most enterprising families before, during and after the renaissance period of history came from around that region.

It was not until 1494 that the double-entry bookkeeping method became the foundation for modern-day accounting. The publishing of the book “Summa de arithmetica, geometria, proportioni et proportionalita (Summary of arithmetic, geometry, proportions, and proportionality)” gave humanity its first comprehensive view of double-entry accounting.

This continued into the 21st century and technology helped humanity to keep the form with its financial record-keeping needs. This was done through legacy systems that were designed after centralized database systems where security has sadly been an issue for so long. 

However, things changed with no blip or notice from anyone in particular when Professor Yuji Ijiri who is a foremost Economics and accounting experts created the concept of triple-entry accounting. In his book “Momentum Accounting & Triple-Entry Bookkeeping” did he define the concept of a third entry where the double-entry has a record of both entries recorded with a third party independent of the first two parties that entered the debit and credit transactions. 

This is the single most important concept that drives decentralized finance because it is upon this that the concept of the decentralized ledger has been derived. Fast forward to late 2008 when an anonymous programmer nicknamed Satoshi Nakamoto was able to combine the triple-entry accounting concept with the ledger concept and cryptography to secure the records and BOOM! Blockchain Technology was born!

Decentralized Finance Rises

Others before this had been trying to develop decentralized systems. It was Satoshi however that came up with the concept of solving the Byzantine General’s problem ( this refers to the verifying the authenticity of the information across the blockchain) using mining ( or solving mathematical problems using cryptographic hashing).

While this presented many problems of its own which many within the crypto space are still trying to solve using different methods of confirming ledger transactions, it also created a new paradigm where decentralized finance (DeFi) was born.

Decentralized finance relies on the existence of a third party for verification of transactions or records that occur within two people. Using different types of systems currently referred to as decentralized ledger technologies (DLTs), the existence of a ledger that is searchable, secure, transparent, accessible in realtime, self-updating and relatively low-cost indicates that humanity is on the edge of something special. 

Decentralized Finance Solves Many Problems

The security of public ledgers is something that has been brought into question. It has been proven time and again especially in recent times that blockchains and other forms of decentralized ledger systems are quite secure as opposed to their centralized counterparts.

The very concept of a 51% attack (where 51% of the nodes can alter the blockchain if united in a specific form) which critics of DLTs have been referring to as the Achilles heel of DLTs has been proven to be false time and time again. The 51% attack concept has even become an old concept with the different kinds of node separation and limits to control of particular nodes coming into play (delegated proof of stake is one such example). 

Googles’ recent quantum mathematics advancements aren’t even enough to break the security of DLTs as the feat was more of a scientific test and it will take several decades before a workable proof-of-concept can be deployed. Even then, the computing speed as demonstrated by Google still won’t be enough to figure out DLTs which would have by then become legacy technology.

The great thing is that DLTs are based on one o the most arcane fields ever known to science and man: cryptography. Cryptographic systems evolve every day and this creates a quandary for anyone seeking to crack the security features of what has today become yesterday’s technology.

Value addition, transparency, security, and affordability are some of the various advantages that Decentralized Finance has to offer mankind. Here is a toast to the late Professor Ijiri: Quoting Alexandra Graham Bell who created the first telephone: “Mr. Watson, come here. I want to see you.”

What do you think?

Will Decentralized Finance take over the World?

Please let us know in the comments below!

2 Comments
  1. […] that have occurred in the African fintech space if indeed the continent is the future of financial technology worldwide. The truth is that the potential that Africa holds is far beyond anything that has been seen so far […]

  2. […] that have occurred in the African fintech space if indeed the continent is the future of financial technology worldwide. The truth is that the potential that Africa holds is far beyond anything that has been seen so far […]

Leave A Reply

Your email address will not be published.

bitcoin
Bitcoin (BTC) $ 8,924.44
ethereum
Ethereum (ETH) $ 170.71
ripple
XRP (XRP) $ 0.232151
bitcoin-cash
Bitcoin Cash (BCH) $ 370.34
bitcoin-cash-sv
Bitcoin SV (BSV) $ 305.36
tether
Tether (USDT) $ 0.997791
eos
EOS (EOS) $ 4.02
litecoin
Litecoin (LTC) $ 58.82
binancecoin
Binance Coin (BNB) $ 17.67
cardano
Cardano (ADA) $ 0.047318