# What is Money

![dollar notes](https://res.cloudinary.com/dsbogvjcc/image/upload/v1626479302/bexl-capital/blog/Picture4_cxysmz.jpg)

Money, one of the most significant inventions of mankind, is the wheel that keeps the majority of our systems running.

Money is any item that is generally accepted as a means of exchange for goods and services. It is any item that serves as a medium of exchange.

However as mentioned earlier, money is an innovation of mankind and as such, it did not always exist. Ages before money was invented people still participated in trade but in the form of exchange of goods and services, this is known as the barter system and it is the origin of trade and money.


### Barter System

The barter system existed for years. People exchanged services and goods for other services and goods in return. People would get rice in exchange for flour. Or, salt in exchange for until they realized that not everything is available or can be grown in the same amount. This made certain goods more valuable than others. 

![exchange of goods](https://res.cloudinary.com/dsbogvjcc/image/upload/v1626479302/bexl-capital/blog/Picture1_stwdan.jpg)

For example, 1 liter of petrol is more valuable than 1 liter of water. This brought about the necessity to create a better medium of exchanging goods, so there was the introduction of a 3rd party item that would convey equal value to both parties in the exchange, unlike the barter system.


### Use of Items as Money

The immediate resolution to the hardship occasioned by the barter system was the use of items as a medium of exchange. Over time various items such as whales’ teeth, barley, cattle, cowries, alcohol, mirrors, limestone rings, shells, etc, have been used as money to pay for goods and services. As you might have guessed this method wasn’t sustainable for many reasons. The key ones are explained below;

- Durability: the majority of these items lacked durability and were subject to wear and tear, spoilage, and even death. Using cattle as money ran the risk of the cattle getting ill and if the cattle died then you've lost your money.

- Portability: a lot of these items were either too heavy when in bulk or too big to be easily moved around.

- Divisibility: the value of some items such as cattle is in them being whole and if split, they lose their entire value.

- Acceptability: even though the majority of the items used as money had some intrinsic value, some people may not accept them as money as value is usually subjective and as such some people may see zero value in some items and refuse to accept them as money.

- Limited supply: one key feature of money is that it must be in limited supply as it would have no value if it's in unlimited supply to everyone. The items used as money were often natural resources that were slightly hard to get and as such people could get these items easily if they tried hard enough. For instance, if cattle were still money, herders would only have to breed more cattle faster. 

Based on the above-mentioned reasons this medium of exchange failed and it brought about the need for another form of money.


### Coinage

This form of money originated from China in 1000BC when bronze and copper imitations of the cowrie were made. These primitive versions of metal money are what developed into coinage later on in 500BC, the first coins were developed in Lydia (modern-day turkey) from melted lumps of silver taking the familiar round form it has till date, and to certify the authenticity of these coins they were marked with either the emperors seal, the sigil of a noble family or the symbol of a god. The difference between this and the Chinese coins was that the new coins were made from precious stones and not metal as such the new form of coinage had more value.

![gold coin](https://res.cloudinary.com/dsbogvjcc/image/upload/v1626479302/bexl-capital/blog/Picture2_ns2fzf.jpg)

The problem faced by coinage came in form of standardization which requires that every coin is the same and should be given the same value, while in reality the coins were different as coins usually wear down naturally or by man through clipping or debasing which is minting coins that look the same but with lower silver or gold content.

Also, the limited supply that monies are required to have will come back to hunt this form of monies. Because precious stones were natural resources that are naturally difficult to come by as that's what makes them be "precious", scarcity was bound to occur and in fact, did occur. Also, the issue of mobility posed a challenge as carrying around large quantities of coins could be exhausting and, in some instances impossible. Once again what was considered as money needed to evolve to solve all these problems.

### Paper Currency

Once again, the Chinese were ahead of the rest of the world in innovating a new medium of exchange, as far back as 806 AD the Chinese already invented a type of paper currency in the form of IOU. The emperor kept their heavy coins back in their palace and issued IOU certificates on paper. Although paper in itself had no intrinsic value, people trusted that it is worth just as much as the coins it was meant to represent and that they could always exchange it for gold or whatever the IOU represented. The Chinese paper currency became widespread around china and the value quickly depreciated and inflation occurred, this resulted in paper currency disappearing in China in 1455AD.

![paper notes](https://res.cloudinary.com/dsbogvjcc/image/upload/v1626479302/bexl-capital/blog/Picture3_fyhkji.jpg)

The paper currency later re-emerged as global trade grew and the need for an easier means of exchange brought about the need for paper currency. It had a long history of ups and downs and even experienced the same issue the Chinese did which was the depreciation of the paper currency which later on led to inflation. To solve the issue faced by paper currency, the value of the paper currency was linked to something with a more stable value, gold. This was known as the GOLD STANDARD which emerged in 1871, guidelines were made to allow for a non-inflatory production of standard banknotes which represented a certain amount of gold. Many countries around the world adopted the gold standard and the benefit was that it created a standard of exchange between different countries. 

The gold standard led to the introduction of central banks and hand in hand they worked to regulate the value of the paper currency. The success of this method popularized it around the globe and paper currency became the norm globally. The gold standard ensured a low inflation rate since each banknote in circulation has to be backed by a certain amount of gold, as such the government could not print more paper currency unless it had the gold equivalent in their gold reserves, therefore rapid money growth and inflation were less likely. Although the gold standard had its positives it also had its negatives, for instance during the great recession of the 1930s, Central banks could not freely expand the money supply to stimulate the economy, when necessary, in this case, the limited supply of currency is a drag on the economy, and this marked the beginning of the end for the gold standard.

![dollar notes](https://res.cloudinary.com/dsbogvjcc/image/upload/v1626479302/bexl-capital/blog/Picture4_cxysmz.jpg)

The need for more flexible exchange rates prevailed and since the early 1970s, the world has stopped trying to maintain the gold standard. Since then, till present day paper currency has gone on to be the most prevalent form of currency due to the more refined system it has over past forms of monies. In the present day, people simply have faith that their currencies will retain their values and the knowledge that so many others share the same faith reinforces the general optimism people have in their money. Also, the government and central bank try to maintain the value of the paper currency through various fiscal policies.


### Digital Money

It is estimated that minted coins and paper money is now used in only 2% of transactions worldwide and this is due to the ease technology has brought about through innovations like electronic banking which enables transactions to take place in a fraction of seconds regardless of distance. Also, in recent times technology has driven innovations aimed at functioning as money, innovations such as cryptocurrency which exhibits the characteristics of money as they are hard to forge, durable, portable, divisible, and limited in supply.

![crypto currencies](https://res.cloudinary.com/dsbogvjcc/image/upload/v1626479302/bexl-capital/blog/Picture5_wnbcbf.jpg)

 In the future, it is expected that this form of money will challenge the power of government-backed fiat currency, and if history is anything to go by, this change is bound to happen.

### Conclusion

So, what again is money? Seeing how the concept of what is considered to be money has changed over time, it's safe to say money is a social contract because it does not exist in objective reality, it exists as a result of human interaction. Money exists because humans agree that it exists, especially paper currency as it's sometimes a wonder how a substance made out of the bark of trees can have so much value bestowed upon it and make it worth more than items with intrinsic value.

As a result of money being a social contract, it is subject to change as seen several times throughout history, as long as people in the society collectively agree to give it value an item would be regarded as money. Due to money being a social contract the currently used monies (fiat currency) are also bound to be replaced in the future by cryptocurrencies or they will be used side by side since they can both coexist. Once countries' central banks start adopting cryptocurrencies as a legal tender, they would eventually overshadow fiat currencies and the wave already started with the nation of El Salvador whose central bank recently adopted Bitcoin as a legal tender. 
It is also predicted that by 2030 cryptocurrencies would have replaced 25% of fiat currencies.

Money, one of the most significant inventions of mankind, is the wheel that keeps the majority of our systems running. Money is an innovation of mankind and as such, it did not always exist.

What is Money?

# What is finance?

Finance is defined as the management of money, and it includes activities such as investing, borrowing, lending, budgeting, and saving. Finance originates from the French word "Finer," which means "to end" and "to pay."  “To end” in this perspective means to settle a dispute or debt that is due. Adapted into English, finance means the management of money. Finance is the lifeline of all activities; economic, social, and administrative. Finance function can be seen in all activities and processes, from savings to financial institutions and governments taxes. Finance is closely related to money because it’s a means of exchange.

### What is Traditional finance/Centralized Finance (CeFi)?
The traditional financial system consists of banks and financial institutions as the main pillars of its operating mechanism. We all have at least one or probably more than one bank account and are using banking services like financial transactions, credit card payments, ATM withdrawals, among others. Banks are quite a powerful constituent of the overall economic scenario, and thanks to globalization, we have today many global banks operating in different parts of the world. The history of traditional finance began in 1694 when the Bank of England was founded to look after the gold of businessmen traveling to the country. Carrying gold around was inconvenient and exposed individuals to the vulnerability of being attacked or mugged. It made a lot of sense to businessmen to store their wealth in a secure vault while carrying out their business. Businessmen were given a receipt for their gold, which allowed them to redeem their precious metals upon exiting the country. 

Today, if you want to access financial services such as borrowing, lending out money, earning interest on savings, investing some money, or applying for a mortgage, the first option is to go to your local bank, where you would need to provide proof of identity, address, employment among many other details before an account can be opened for you.  Other options could be through a financial advisor or a broker. The current traditional financial system relies heavily on banks and financial institutions to provide these services to its customers. Despite a century of innovations in the traditional financial system, it is still far from perfect; settlement of stocks, bonds, and other financial instruments takes days to clear and requires a massive amount of human capital to be involved in the process. 

### Criticisms of The Traditional Finance System.
1. Centralization: Traditionally, financial services are offered in a centralized manner, where central entities such as the government and banks are responsible for governing the way currencies are issued, regulated, and traded. A privileged few make financial decisions affecting billions of people behind closed doors.

2. Use of 3rd parties:  traditional banking makes use of 3rd parties to carry out transactions. To complete a transaction, it will have to pass through middlemen. Typically carrying out a transaction would follow this process; from you(sender) to a middleman like your bank or some payment channels like Interswitch, VISA, or MasterCard, then to you your receiver's bank, and finally to the receiver. The process involves too many parties.

3. The difficulty associated with international banking: the traditional finance system is inefficient in conducting international transactions. High costs of charges and the slow processing time are the norms for international transactions.

4. Unequal access to banking services: millions of people are left unbanked across the globe.

5. Heavy reliance on human capital: banks and financial institutions hire millions of people to maintain an inefficient system while also keeping up with ever-changing banking laws.

6. A super high barrier for new entries: it's challenging, if not impossible, to create a new financial company without access to tremendous amount of capital hence stifling innovation. 

![tradition finance](https://res.cloudinary.com/dsbogvjcc/image/upload/v1628296883/bexl-capital/blog/traditional_finance_uxlvw7.png)

Decentralized finance (Defi)
On the other hand, a decentralized financial system is a financial system that is governed by users, and no central entity can control it. Defi (Decentralized Finance) is a new kind of financial ecosystem that is built on the blockchain. Transactions on a blockchain are peer-to-peer, transparent, and encrypted (secure). The idea behind decentralized financial systems is to carry out processes without or at least with little influence from third parties such as banks or financial intermediaries, which saves both time and costs. On the other hand, the control over the respective money and assets lies mainly or even wholly with the individual owners. 

Decentralized Finance (Defi) refers to financial products and services that replicate traditional financial offerings by leveraging a blockchain's trustless and transparent platform. Decentralized finance (Defi) is an emerging industry that promises to revolutionize the traditional finance sector. The need for an open, transparent, and secure financial system is the key driver behind the decentralized finance vs. traditional finance debate, so it does not come as a surprise that decentralized finance is slowly emerging as an alternative to today’s financial system. It has the potential to disrupt traditional finance because of its ability to be a financial tool outside the government's regulatory control. Decentralized finance is still at its developmental stage, and it is relatively new to many of us. 

Decentralized financial systems offer a whole range of advantages that make them more flexible, faster, and less complicated than our traditional centralized system. Until now, we have been dependent on entrusting our money and assets to a third party, usually a bank. On the other hand, the decentralized financial system gives individuals total control over their respective money and assets. In a decentralized financial system, the idea is that each individual has his or her own digital wallet, in which they store their digital assets independent of a third party as an administrator or intermediary; hence transactions between individuals are now directly from each individual to the other.

![decentralized finance](https://res.cloudinary.com/dsbogvjcc/image/upload/v1628296883/bexl-capital/blog/decentralized_finance_ymxbbt.png)

In Defi, a smart contract replaces the financial institution in the transaction. A smart contract is a programmable contract that can hold funds and send or refund them based on certain conditions. No one can alter a smart contract when it's live; hence it will always run as programmed.

Decentralized finance started gaining prominence as a replacement for the traditional finance system in 2018 when 15 Ethereum-based projects came together with the aim of building an independent, secure, and open financial system. Some of the early proponents behind the Defi movement included [MakerDao](https://makerdao.com/en/), [Origin Protocol](https://www.originprotocol.com/en), and [Paradigm](https://www.paradigm.xyz/).

### Advantages Of Decentralized Financial Systems Over Traditional Financial Systems.

Defi may increase the efficiency, transparency, and accessibility of the financial infrastructure.

- Decentralized finance stands out as an alternative to traditional finance because it can eliminate financial bureaucracy, which is a burden of today’s financial system.

- Defi was inspired by the aversion to governments and other financial institutions after the real estate bubble of 2008. In the same spirit, Defi essentially eliminates the need for financial institutions and governments when accessing financial products and is therefore also referred to as Open Finance.

- The decentralized financial system uses a public distributed ledger system through blockchain technology, and it acts as the trusted source governing all operations in the financial sector as opposed to the traditional financial system that entails governments and financial institutions acting as a trusted source governing all operations in the traditional finance.

- Decentralized finance is also proving to be a reliable method of overcome issues related to hyperinflation resulting from currency manipulation or unexpected devaluations.

- Decentralized finance doesn't have cumbersome barriers for entry for emerging financial companies as seen in traditional finance. Anybody with programming skills can build financial services and tools on top of the public blockchain.

- Decentralized finance will be able to provide financial services without geographical barriers and reach places where traditional finance systems have struggled to reach.

- Decentralized finance offers the possibility of providing uncensored global finances. In a world where people value their privacy, any product that makes it possible to avoid unethical encroachments from any centralized authority will be enticing for people who value their financial privacy.

- The integration of blockchain technology into a number of financial products, such as Ripple, makes it possible for people to send and receive money without having to worry about bans or restrictions. The fact that people cannot track transactions using digital ledger technologies makes it possible to complete transactions without having to worry about privacy violations by governments. 

- Decentralized financial systems don't require heavy human capital as most of the processes are carried out through smart contracts. Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being written directly into lines of code. It enables transactions and agreements to be carried out among disparate anonymous parties without the need for a central authority, legal system, or external enforcement mechanism. Smart contracts render transactions' traceable, transparent, and irreversible. The use of smart contracts in decentralized finance eliminates the need for human capital and 3rd parties of any sort.  While much of the traditional financial system is trust-based and dependent on centralized institutions, Defi replaces some trust requirements with smart contracts. The contracts can assume the roles of custodians, escrow agents, and CounterParties. For example, if two parties want to exchange digital assets in the form of tokens, there is no need for guarantees from a CounterParty.

Despite all these promising possibilities, we also see that a fully decentralized financial world still seems to be a vision of the future.

### Criticisms Of Decentralized Finance

Decentralized finance (Defi) is an emerging industry that promises to revolutionize the traditional finance sector. Decentralized finance is still at its developmental stage and still has a few hurdles to overcome before it can topple the traditional financial system. 

1. One of the biggest challenges that could stop decentralized finance from replacing traditional finance systems is the aspect of people being forced to trust unregulated open-source code.

2. Although some blockchains are virtually impossible to hack, the cryptocurrency world still stands the risk of being vulnerable to hacks, often resulting in large sums of money disappearing.

3. The most considerable risk of the Defi ecosystem is the same risk that applies to all investments in the world of cryptocurrency. If you get locked out of your wallet, then you have lost your entire investment. This can be avoided by backing up your account information.

4. Unlike its centralized counterparts, there is no general body to report cases of fraud that occur in decentralized finance.

5. The Defi space is still developing. Hence it is not user-friendly, and it has proved difficult for non-tech-savvy users to navigate. 

6. The smart contracts that Defi platforms use can have bugs, making them malfunction, resulting in users getting their funds stuck in the smart contract. However, to protect users against such occurrences, there are Defi insurance platforms like etherisc and nexus mutual, giving users the confidence to use Defi platforms.

The technology behind the decentralized finance application is still underdeveloped and unfriendly, and it will always be prone to vulnerabilities that would damage the technology’s reputation. It is important to note that the Defi space is still in a developmental stage, and as such, it is bound to overcome the majority if not all the current hurdles it is currently facing.  We are also bound to see a gradual but decisive shift from the traditional finance system to the decentralized financial system. This is due to the continuous failings of centralized bodies such as governments and banks. The financial crisis of 2008, where many people lost their fortunes as a good number of banks went under, is a prime example of the numerous failings of the traditional financial system. Concerned by the threat posed by the current traditional financial systems, many people are looking to emerging technologies to shield themselves, and this is where Defi comes in to shape the future of our financial systems.

Defi is the right step in the evolution of banking and finance. It is clear that the decentralized finance industry undoubtedly has vast potential. Although there is speculation over whether decentralized finance is yet another bubble, I believe it is here to stay. 
However, its continued existence depends on how quickly Defi can overcome its current criticisms and how rapidly centralized finance institutions incorporate Defi.



Finance is defined as the management of money, and it includes activities such as investing, borrowing, lending, budgeting, and saving. Finance originates from the French word "Finer," which means "to end" and "to pay".

Traditional Finance and Decentralized Finance

Inflation can be defined in many ways; it can be defined as a decrease in the purchasing power of a currency; it can also be defined as an increase in the general price level of goods and services.