When asked to identify the next proving ground of decentralized finance (DeFi), most people would probably point to Silicon Valley, Hong Kong, London or any other high-powered tech hub where innovation is only ever a corner block away. They probably wouldn’t pick a remote farming village built so far out from the nearest town that getting to a bank is a four-hour endeavor.
But maybe they should.
There’s no mistaking DeFi’s ascension into a global financial phenomenon. In the span of a year, the total value locked in DeFi markets spiked from $631 million to more than $41 billion. Some decentralized trading platforms regularly handle tens of billions in volume every month; automated loan providers can now facilitate loans that top $200 million.
These metrics represent growth so unbelievable that if it weren’t plainly recorded, you’d dismiss it as fantasy. Faced with them, one can’t help but think the seeds of a DeFi revolution have already taken root. To borrow a quip from the noted cryptocurrency proponent and co-founder of the Gemini exchange, Tyler Winklevoss, “Software is eating the world. DeFi is the software that is starting to eat Wall Street.”
But is it? While it’s undoubtedly true that DeFi’s growth has been explosive and prompted interest among traditional banks and other financial players, it hasn’t turned into a consumer movement.
“The space is very experimental,” Hong Fang, the CEO of OKCoin, told American Banker earlier this year. “I don't think we will wake up tomorrow and see banks, Nasdaq or Fidelity being taken out. This is still a pioneer sector. People who are crypto literate will be attracted to it.”
Fang’s point rather neatly sums up the crux of the matter. Cryptocurrency enthusiasts look at DeFi's expansion and celebrate the potential for achieving truly transparent, accountable and democratic money management. Other consumers see the boom, raise their eyebrows and promptly return to their conventional banking app.
Cryptocurrency proponents in tech hubs want DeFi for philosophical reasons. But they don’t have a practical need for it. Sure, DeFi could enable anyone with an internet connection and a smartphone to make payments, access credit and otherwise engage with the financial system – but most people in developed economies can already do that.
While the news that DeFi could facilitate a more efficient, democratic and secure financial system is interesting to these consumers, it does not shock them. Moreover, because consumers’ day-to-day banking needs are already met by established banking institutions, their motivation to switch from fiat to crypto or take the time to understand DeFi technology is limited at best.
When added to the fact that DeFi already faces significant hurdles of regulatory uncertainty and niche use cases, it’s no wonder that DeFi hasn’t become a go-to financial fix in established markets.
But what of emerging markets?
Think about it. Who has a more practical need for DeFi solutions, people who already manage their money through the bank around the corner or people who don’t have a bank?
According to research published by the World Bank, about 1.7 billion adults worldwide are currently unbanked, meaning they do not have an account with a financial institution or mobile money provider. Moreover, because banking is so well-established as to be nearly universal in high-income countries, the vast majority of the unbanked reside in developing economies. China currently has the most unbanked adults (225 million), though India (190 million), Pakistan (100 million), and Indonesia (95 million) have high rates of unbanked residents as well.
The consequences of not having access to financial services can be severe. People who are unbanked have little to no ability to send or save money safely; they cannot access loans or make purchases without cash. According to the report mentioned above, the most commonly-cited barrier to opening an account was not having enough money. But researchers noted that these consumers aren’t necessarily opposed to banking.
“Worldwide, 30% of adults without an account at a financial institution said that they do not need one, making this the second most common reason cited. Yet only 3% cited it as their only reason for not having an account,” the researchers pointed out. “This suggests that among those reporting lack of need as one of several reasons, some might be open to using financial services if the services are accessible and relevant to their lives.”
The need for unconventional banking services exists in emerging economies, far more so than it does in established ones. Given intuitive interfaces and the proper packaging, unbanked people and businesses could present a significant opportunity for DeFi growth.
Consider the factors at hand. Digital devices are becoming cheaper and more accessible than ever before, with two-thirds of unbanked persons owning a mobile phone. By 2018, over half (3.9 billion) people were using the internet, and 2 billion were managing their money online. The infrastructure, interest and need for wholly-digital, blockchain-secured services is clearly already there – all that remains is for DeFi proponents to provide consumer-friendly solutions.
It’s also worth noting that rolling out unconventional financial solutions to unbanked communities isn’t a new challenge; it’s been done before and successfully. Consider the expansion of M-Pesa in Kenya as an example. This mobile money system, which debuted in 2007 and now has 72% penetration, allows users to make a deposit or get cash via texting – no smartphone or computer required. These transactions are facilitated by human agents, who linger at set locations and serve more or less like ATMs.
As one Vox journalist concluded, “In countries where almost no one has a bank account or a bank branch, agents represent a huge step forward in the availability of cash when you need it and a safe place to deposit it when you don’t.”
The benefits of the mobile money system are well-demonstrated, too. One study conducted in 2016 found that people who lived closer to mobile money agents were significantly less likely to be living in poverty, let alone extreme poverty. Mobile money systems like M-Pesa are very different from decentralized apps (dapps). However, the program’s resounding success demonstrates that unbanked consumers will flock to digitally-facilitated solutions that meet their financial needs.
If we want DeFi to become a functional standard and create a blueprint that works, we need to stop focusing on tech hubs that already have banking solutions and look to places that need the support dapps provide. Enthusiasts may innovate, but it’s consumers who truly push new products to market success. In this context, a remote farming village would be a more arable place for the DeFi revolution to grow – we just need to scatter the seeds.
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