Whilst decentralised finance (DeFi) is the new kid on the block in Web3, a type of decentralised finance was alive and well back in the 2000s. Except back then, it wasn't called decentralised finance, it was peer to peer (P2P) finance.

Peer to peer networks exploded at the turn of the millennium with the launch of the Napster music file-sharing network. We all saw how Napster and other file-sharing networks wreaked havoc on the music industry with musicians and artists ultimately taking the hit. 

These peer to peer networks were decentralised networks made up of thousands of nodes running around the world, that couldn't be shut down. However, unlike the blockchain networks of Web3, there was no distributed ledger component, these nodes were used for sharing files between users of the network. 

We saw a new type of financial platform emerge during this time, one that incorporated the phrase peer to peer into its namesake. However, these platforms were not in any way decentralised like today's Web3 protocols, they were really marketplaces for financial products where the peer to peer was in reference to the fact that these platforms matched lenders with borrowers. Hence they were described as peer to peer lending platforms. They could just have easily been called decentralised back then, but thankfully they weren't as DeFi sounds a lot cooler than P2P lending! 

The P2P lending platforms started emerging in the mid-2000s with Zopa and then Funding Circle in the UK, and Prosper and LendingClub in the US. When these platforms first emerged they were considered revolutionary with the potential to open up entire new segments of the lending industries to serve less creditworthy individuals and small businesses that often failed to secure loans from more established banks and other lending institutions. 

Much like DeFi and crypto now, investors flocked to them due to the yields that they could generate. Yields of over 10% were not uncommon. This was significant considering at the time most conventional asset yields such as bonds had suffered significantly following the global financial crisis. 

Naturally, such yields caught the attention of the regulators, such as the SEC and FCA who in time created legislation that any lenders had to adhere to. This was exacerbated by the fact that some P2P lenders' risk models were inadequate, which resulted in far higher default rates for their borrowers than expected. This resulted in investors losing money, and in some instances the platforms going out of business. 

In its heyday, it certainly was a wild west but over time, with increased competition and regulation, the P2P lending space grew less attractive as the return provided to investors reduced to a more mundane figure. 

P2P lending also marked the birth of what we now call fintech — the financial technology created to improve and automate our existing financial services. Whist blockchain and DeFi are bundled under the broader banner of fintech now, back in the 2010s, off the back of P2P lending and fresh from the global financial crisis, whole new businesses such as neobanks emerged intending to disrupt the financial status quo. 

If we want to look to the future to think about how Web3 and DeFi can impact finance, I believe it's important to take heed of what's happened in the last 15 plus years of fintech innovation. As mentioned above, P2P lending was focused on opening up new parts of the financial markets, empowering retail investors to become lenders to borrowers who couldn't previously obtain credit. There are certainly parallels with parts of the DeFi market insomuch as it now offers a wide range of attractive yield opportunities via lending and staking of crypto-assets and stablecoins, with varying degrees of platform risk and asset risk associated with them. 

The DeFi markets have yet to be regulated but when they are, we'll likely see DeFi split between regulated protocols that enforce KYC, sanctions and anti-money laundering requirements, versus unregulated DeFi which has no restrictions on who can use it.