The Basics of Finance, the Promises of DeFi: What's Missing in This System?

Last week, we talked about Bitcoin and the financial conditions it emerged from.

This week, I thought we could look at how the movement that started with Bitcoin has continued with DeFi (decentralized finance).

If you ask what’s at the center of modern life, whether we like it or not, most of us would probably say “money.” But what exactly is this “money” that’s so essential? How is it created, where does it go, and who controls it? Have you ever thought about that?

Let’s first take a look at the current system.

The Realities Behind Money

The balances we see in our bank accounts today are values that are “as if” they exist. A significant portion of our deposits is actually loaned out to someone else. So, in reality, the money in circulation grows and multiplies through the lending power of banks.

Interest rates are a key mechanism in this system. When a bank lends you money, it charges interest; similarly, you earn interest when you save. At the heart of this system are central banks. They control the money supply and set interest rates.

But is this system fair? Or how fair is it?

How Did the Modern Monetary System Get Here?

In the past, a country couldn’t just print as much money as it wanted. Every banknote printed had to be backed by a reserve like gold. This was called the gold standard. It meant that a central bank had to hold gold equivalent to the money it issued. There was a limit, a foundation, to money.

But in 1971, U.S. President Richard Nixon completely changed this by removing the dollar’s tie to gold. Now, money started to be created based on the decisions of central banks, not on tangible backing.

Today, most money isn’t physical but digital. There’s much more money “existing” on screens than the paper money we hold. In fact, research shows that over 90% of the money in circulation globally is digital, only visible as balances. This means countries have much more digital money than physical notes or gold reserves.

In short, there’s an abundance of money that seems to exist but isn’t tangible. This is one of the fundamental structures laying the groundwork for inflation, loss of purchasing power, and financial crises.

Trust, But in Whom?

We have to trust banks because it seems like we have no other choice.

But we’ve paid a heavy price for this trust at times:

2008 Crisis: The crisis we discussed in more detail in the previous article, which also laid the foundation for today’s blockchain philosophy. Opaque financial products, excessive credit creation, risky assets being rated as “excellent” through rating games…
Turkey’s 2001 and 2018 Crises: Sudden currency shocks caused by high interest-low exchange rate policies, eroding people’s savings.
2023 U.S. Banking Crisis: The collapse of big banks like Silicon Valley Bank struck a blow to the “deposits are safe” narrative.

Trust was at the center of the system. But when the system collapsed, we were left watching from the sidelines.

What Does DeFi Promise?

DeFi (Decentralized Finance) emerged as an alternative to this centralized structure. The basic principle is:

“Trust in code, not institutions.” (Code is law.)

You can transact without intermediaries.
Rules are equal for everyone and pre-coded.
There’s transparency: everyone can audit and track all transactions.
It’s a system open 24/7, independent of geography, asking for no passports.

This means things like bank holidays, SWIFT waiting times, transfer fees, credit scores, and approval processes could become history.

But Is Everything That Simple?

Definitely not. There are many risks in the DeFi world, and we’re still at the very beginning.

As we move forward slowly, in baby steps, there are many problems within this brand-new alternative system, such as smart contract errors, lack of regulations, and Ponzi-like projects.

On the other hand, the core of decentralized financial systems, taking responsibility for your assets and managing and protecting them yourself (blockchain-based wallets), is another topic of discussion altogether, which we’ll explore in more detail in another article.

So, in reality, DeFi isn’t a mature or perfect solution either.

But here’s the real issue:

Having a choice.

If today’s system only offers you “trust in the existing bank or central banks,” DeFi brings “trust in code” as an alternative. And even that alone is a pressure point to make the system more transparent and user-focused.

Do you think an “alternative system” is possible in the world of finance?

Do you believe alternative solutions like DeFi can replace the centralized systems we have today?