As much as the global economy continues to grow, we are leaving billions of people behind who don’t have bank accounts, a reality that is exacerbated by the economic impacts of the coronavirus. Without a bank account, a person can’t get a loan, invest or earn interest on savings. Decentralized finance, or DeFi, confronts this problem head-on by democratizing access to financial services.
Anyone with an internet connection can deposit digital assets into DeFi protocols and start earning interest as passive income. They can put up their digital assets as collateral to acquire a loan. They can earn passive income by yield farming or by adding their digital assets to liquidity pools and collecting fees on trades.
Making these types of wealth generation opportunities available to everyone, including people in developing regions, is what will eventually close financial inclusion gaps, help people out of poverty and transform global monetary systems for the better.
Gregory Keough is the founder of the DMM Foundation, the organization behind the DeFi Money Market (DMM).
While not a panacea – DeFi is still an immature industry with capital and human risks – it presents a ramp into a financial system where people can put their money to work.
Over time, we’ve seen economic uncertainty spur interest in cryptocurrencies. Adoption of bitcoin increased in Venezuela amid hyperinflation, for example. Additionally, the Bitcoin white paper was released in response to the fallout from the 2008 financial crisis. We are in the midst of another period of economic uncertainty today, and are seeing surging bitcoin prices and skyrocketing participation in DeFi.
As the United Nations Secretary-General (UNSG) António Guterres expressed in a recent speech, “We are experiencing the sharpest decline in per capita income since 1870.” With 70 million to 100 million people at risk of being pushed into extreme poverty, the World Economic Forum (WEF) is rightly focusing on financial inclusion initiatives. Patrick Njorge, governor of the Central Bank of Kenya, conveyed in a WEF article that digital financial services have been invaluable to helping keep people out of poverty throughout the [COVID-19] pandemic by “enabling people to pay for goods and services, receive compensation for their work, access social-assistance payments and secure financial support, such as bank loans, for their distressed businesses.”
As advantageous as such digital financial services have been, however, they rely on a broken financial system and fail to address the core issues that are keeping billions of people from participating in the global economy.
How DeFi takes finance to the next level
DeFi’s ability to improve access to financial services, regardless of whether or not peopple hold a bank account, creates an entirely new framework for finance that is ultimately better for people.
First, DeFi systems allow anyone to get a loan. Lending and borrowing is key to business growth and entrepreneurship, and without loans many people cannot gain the financing they need to jump-start businesses or advance their livelihoods in terms of career, education and family growth.
In the midst of the coronavirus recession, it’s that much more essential for entrepreneurs to gain access to capital, as small and medium businesses will be the primary job creators worldwide. When people have jobs, they purchase goods and services – actions that propel the economy.
See also: Frances Coppola – Why Bitcoin Thrives (and Why It Won’t Replace the Dollar)
Secondly, DeFi confronts the issue of currency debasement that has plagued traditional monetary systems since the abandonment of the gold standard. Given the lack of asset backing or a value peg, fiat currency inevitably experiences inflation. This means the dollar, euro or yuan a person earns today will be worth less tomorrow.
Such a system is not conducive to business or personal financial growth. DeFi operates outside any government or central bank and so does not experience the same debasement as fiat instruments. DeFi protocols that allow for the generation of positive, stable yield are bringing earned interest back into the global monetary financial system.
Furthermore, DeFi offers more privacy, resistance to financial censorship as well as much-needed transparency and accountability into financial systems. Given all code is public and available for anyone to review, DeFi ameliorates concerns of corruption and theft that flourish when transparency is lacking.
Though thefts do occur on DeFi protocols, these hacks are generally due to negligence on the part of the protocol creators in conducting security audits. If there is a vulnerability in the code, bad actors will exploit it, hence a need for thorough smart contract auditing prior to launch.
What's next for DeFi?
Given how revolutionary DeFi is, it’s natural to wonder why everyone isn’t already using it. For one, DeFi protocols have a way to go before ease of use is on par with online trading platforms like Robinhood or payment apps like Venmo. Admittedly, getting a loan using your digital assets as collateral is not yet as simple as making a purchase from Amazon.com.
The ease-of-use hurdle is contributing to a lack of diversity in the DeFi user base that protocols should seek to address. According to a CoinGecko survey, DeFi users are dominated by males between the ages of 20-40 years old. As usability improves and more people become aware of DeFi services, these participation gaps will diminish.
See also: DeFi Dad – Five Years In, DeFi Now Defines Ethereum
Additionally, we need to continue to press for expanded internet access across the globe. Without internet access, people are barred from participating in the growing digital economy and all the financial services DeFi provides. According to a United Nations report on digital finance, “750 million people lack broadband connectivity.” As access to smartphones continues to expand, we will witness a global transition to DeFi to close financial inclusion gaps and ensure everyone can participate in the global, digital economy.