Last week, Twitter (TWTR  ) and Square (SQ  ) founder and CEO Jack Dorsey announced that Square was launching a defi platform for developers to create projects around bitcoin. So far, most defi projects have been built on top of ethereum. Dorsey said the project's goal was to make "it easy to create non-custodial, permissionless, and decentralized financial services." This follows an earlier announcement from Dorsey that Square was working on a bitcoin hardware wallet.

The announcement is making waves for two reasons. The first is that bitcoin has been lagging behind newer cryptocurrencies which are more adaptable for purposes beyond speculation or being a "store of wealth." Dorsey and Square's involvement could help unlock smart contracts with bitcoin and help it stay competitive with other coins for commercial purposes. It could lead to more businesses and apps being built on top of bitcoin just like ethereum.

The second reason is that Square's involvement with defi could be seen as a step closer to legitimizing this area which is often considered the "Wild West." This is because there's little institutional participation, and many are naturally distrustful. However, if a large and public company were backing the technology, then many players on the sidelines could look to get involved.

deFi Background

During the last phase of crypto-mania which peaked at the end of 2017, a huge surge in buying was driven by initial coin offerings (ICO). These were essentially offshoots of bitcoin and ethereum, and people were buying the coins in hopes of similar returns. It also fed into higher prices for bitcoin and ethereum as these coins were necessary to participate in ICOs.

This time, crypto buying has been driven by decentralized finance which is primarily built on top of ethereum. Defi has grown from $1 billion at the beginning of 2020 to an estimated $80 billion currently. Essentially, defi offers traditional financial services but with no intermediary so users can give or take loans, make trades, or participate in DAOs. Of course, there is tons of skepticism that these can function especially through enhanced periods of market volatility.

And many point to the fact that the vast majority of ICOs were nothing more than get rich quick schemes as a plausible endpoint for many defi protocols. However, it must be said that defi has continued to work despite a more than 50% drop in coin prices. Further, it also seems logical that cryptocurrencies can eliminate the middle-man as the Internet has done in so many industries.