In order to understand why 2019 was the year of DeFi, let’s break down what makes the open financial movement so revolutionary, and examine the strides the phenomenon has made towards creating an open financial system.

Defining DeFi

Open finance — or decentralized finance — refers to the paradigm shift from today’s closed financial system towards an open financial economy based on open protocols that are interoperable, programmable, and composable.

As the crypto ecosystem looks to expand, the term Open Finance more accurately describes the intended destination, because Ethereum is creating a new on-chain economy that integrates with current financial systems. Open finance is not about creating a new system from scratch, it’s about democratizing the existing system and making it more equitable using open protocols and transparent data.

Every financial system requires numerous traits to become an economic engine, but first, we must define those criteria. There are a few generally accepted characteristics that comprise any economic system.

A functioning financial system contains global, efficient markets that allow for:

• The ability for borrows and lenders to transfer capital
• A process of exchange and trading (i.e., derivatives) with the necessary liquidity
• Means for individuals/investors to move, save, formulate, and allocate capital
• The capacity to offset and manage risk
• And provides regulatory protections for investors and individuals

So a new financial system that is open must meet these attributes while removing the typical intermediaries or centralized points of control. Let’s examine the above characteristics and how they compare to the Ethereum ecosystem.