Last year, I was invited by a certain school to write a part of the blockchain + finance textbook. Unfortunately, due to some reasons, we were unable to collaborate in the end. Since I have already written some content, I think it would be a waste not to publish it. I will release the completed articles in a serialized form.
The Mystery of Capital#
We all know that not everything that is real and useful is tangible or visible. For example, time exists, but it can only be effectively controlled and utilized through a clock or a calendar. Throughout human history, we have created a series of ways to express ourselves - text, musical notes, accounting, double-entry bookkeeping... These things cannot be touched by human hands, but they can be understood through our thoughts.
- Hernando de Soto: "The Mystery of Capital"
Hernando de Soto's book "The Mystery of Capital," published in 2000, mainly answers the question of why capitalism has been successful in the West, while encountering setbacks when some Third World and former communist countries adopt measures to develop a market economy.
After years of field research and data analysis in multiple Third World countries, de Soto and his team concluded that "these failures have nothing to do with cultural heritage or genetic defects." The problem lies in the overlooked institutional guarantee of the basic foundation - the formal property rights system. In a typical underdeveloped Third World country, no one knows who owns what; residents' addresses are difficult to verify; debts can go unpaid; assets cannot be converted into currency; ownership cannot be divided into shares; there are various descriptions of assets without unified standards, making comparisons inconvenient.
The prescription de Soto offers to these countries is to establish a sound property rights system, allowing everyone to legally own their assets within a legal framework and establish a comprehensive system for rights confirmation and transactions. In this way, the previously ambiguous and "dead" capital, which was in the gray area, emerges into an openly legal exchange network, becoming "live" capital that can be sold, mortgaged, and divided into shares for financing. These countries activate the potential of the already existing "dead capital" through such a system, laying the foundation for a virtuous cycle of capitalist wealth creation.
Using "The Mystery of Capital" as an introduction to decentralized finance (DeFi) is quite appropriate. If de Soto's prescription is a method of legalizing dispersed ownership in the gray area and incorporating it into a unified system under sovereign states, then the method of DeFi is a reverse path - in an open field, anyone can create a system for rights confirmation and transactions. These systems are initially fixed on the blockchain and become a global system accessible to everyone. The remaining question is which systems can stand out and be widely used by users.
In the field of blockchain, we usually don't call them "systems," but "protocols." The operating mechanism of a system can be saved on the blockchain in the form of code, and this code carrier is called a "smart contract." One or more smart contracts that implement a specific system (more commonly referred to as a "mechanism") are called "protocols." DeFi protocols refer to a specific class of protocols that implement financial functions such as trading, lending, investing, insurance, derivatives, etc.
Although the concept of DeFi exploded and became a market hot spot in 2020, its origins can be traced back to the infancy of blockchain. The following introduction to DeFi will first explain the development of relevant concepts in the early history of blockchain as a foundation for subsequent discussions. Then, the focus will be on the development and rise of DeFi, introducing and evaluating important projects in each sector. Finally, there will be an outlook on DeFi, including speculative thoughts on its social impact on a larger scale.