Over a year ago, my colleague Michael Kucinsky wondered whether we were ready for decentralized finance (DeFi). The benefits of going down that road were pretty clear back then: more flexibility, availability, transparency, and security for everything related to the financial world. But the obstacles and challenges also remain the same. Countries still have to massively adopt cryptocurrencies and go cashless for DeFi to work, and right now, only El Salvador has done so by adopting bitcoin.
In that article, Michael argued that the popularization of DeFi would only be possible with decisive political action (aside from the intrinsic challenges of decentralization itself, such as security and UX-related ones). That’s why I’m insisting on this topic—because only by making DeFi more visible will we push it into the public agenda.
And we need to do that because the very concept of decentralization can greatly expand the finance industry in amazing ways. Here’s how that could happen.
Traditional Financial Hurdles
According to the World Bank, approximately one-third of the world’s population can’t access financial services today. This situation is especially dire when it comes to lending, mainly because all those people lack access to credit (which can make a huge difference in terms of building wealth). That means that the traditional finance system has inequality embedded at its core.
Think I’m exaggerating? Consider the credit rating systems in place in many countries around the world. How can it be fair for such a system to determine whether someone is “worthy” of accessing financial opportunities based on hazy criteria? Such a system leaves out a considerable portion of people basically because they lack proper records or specific connections.
Unfortunately, that’s hardly the only problem with traditional financial systems. There’s also a huge issue with savings. If you don’t have a savings account, you’re basically out of the system and forced to save on your own. If you do have one, you have to play by the financial system’s rules, which often deal with sub-inflation rates for all its deposits.
Both of those are huge problems of the traditional approach to finance, but they are far from being the only ones. Lengthy, overcomplicated, and bureaucratic processes, imposed services and taxes, and a flawed approach to privacy are other hurdles that people have to deal with if they stick with traditional financial organizations.
A Shift in Paradigm
DeFi is an answer to all those issues I’ve just mentioned. In fact, DeFi’s promise is so big that it can usher in a paradigm shift for the entire financial industry. Thanks to the use of decentralized apps (dApps) and nodes connected through a vast network ecosystem, people and organizations alike can use smart contracts that self-enforce themselves automatically, collectively validating and recording every transaction in immutable records.
That might seem like a bunch of jargon, but it’s far from that. By using several interconnected networks of individual and independent computers with no central server, you eliminate the need for gatekeepers. Thus, all the financial transactions in that ecosystem are validated by the ecosystem as a whole rather than by the almost arbitrary criteria of a central figure or institution. This results in increased transparency and efficiency for all parties involved.
The core benefit of decentralization is the expansion of the whole system. That’s because anyone with a modern device can plug into one of the many networks of the financial system and start making transactions. Since there are no barriers to entry or central authority to deny that access, anyone can make deposits or borrow and lend money. The only requirement for participating is having that device. After that, everyone plays by the rules of the smart contracts in place.
Decentralization can also benefit people who want to save money. Rather than paying subpar interest on deposits, decentralized financial networks can offer rewards for people playing specific roles, such as working as a PoS validator. This can lead to the generation of passive income in cryptocurrencies that are greater than those offered by traditional banks and financial institutions.
What’s more, DeFi can open the door for more people to enter the financial world and generate more income for everyone. This can be extremely beneficial for those people as well as organizations and governments because more people would enter the financial system that moves local, regional, and global markets.
The Future Looks Bright
In Michael’s article, he said that “the DeFi ecosystem may become the future of the finance industry.” Right now, and given how quickly the general opinion is changing surrounding cryptocurrencies and decentralized finance, it feels like that future is more likely than ever. And that will certainly be a bright future.
Naturally, I’m talking in future tense because we still have to wait for the political debate to take place. Though, do we have to sit around and wait for that to happen? Not necessarily. We still need to fine-tune certain aspects of DeFi, especially those regarding infrastructure costs, systemic complexities, and overall risk. Aside from that, we also need to start working in the DeFi experience itself, which many times feels somewhat elitist and overcomplex.
If we truly want to expand the financial services sector, we need to take a look beyond mere economic growth. We need to approach that expansion with a human-centered approach that guarantees greater access, more opportunities, and fewer entry barriers for people all over the world. The challenge is huge and needs further discussion, but decentralization surely feels like the key to unlocking that heavy door.