How DeFi Will Help the Unbanked Worldwide
Of a global population of over 7.8 billion, it was estimated that 1.7 billion people have limited or no access to financial services, and therefore limited or no access to many corresponding opportunities, from the ability to accrue savings in an account, to avoidance of natural disasters through immigration, to the purchase of property including housing and access to higher-paying, safer employment. Simply receiving and sending money to friends or family becomes an impossibility for the “unbanked.”
As the chart from 2017 shows, this unfortunate situation has been most common in China, India, Pakistan, and Indonesia. Yet even in developed countries like Brazil, the numbers are high. In 2020, we are still living in a world divided financially between those who have access to banking and financing facilities and those who don't.
The reasons for this lack of inclusion include lack of proof of identification, lack of regular employment, lack of trust in banking institutions plus the high fees associated with banking. Any and sometimes a combination of these issues play a part in why people do not have access to even basic financial services like a checking or a savings account at a bank.
Financial inclusion is essential to ending poverty in developing countries, according to Ceyla Pazarbasioglu, vice-president for equitable growth, finance, and institutions at the World Bank. She has stated, “You need to make sure it (finance) serves citizens, the SMEs, and not just the banker, or the wealthy, or the chosen few.”
In 2017 the World Bank stated on its site a goal to achieve “Universal Financial Access” for all by 2020, yet today this has not yet been accomplished.
DeFi or Decentralized Finance shows great potential to solve this problem. Through the use of decentralized distributed ledger tools, protocols, platforms, and applications a new world of possibility opens for the world’s unbanked.
Elements and advantages of DeFi include:
Cryptocurrencies: The use of cryptocurrencies with a hard cap on mining like Bitcoin at 21 million offers those in countries vulnerable to hyperinflation like Zimbabwe, Venezuela, and Argentina a hedge against this central banking inflicted destruction of personal capital. Even stablecoins like USDT, USDC, and DAI which are pegged to the US dollar, may offer more financial stability and a hedge against inflation for those in countries where the state currency is more vulnerable and volatile.
Digital Currency Wallets: The use of digital wallets, whether via an app through a smartphone, as a virtual wallet on a computer - and especially cold storage devices such as Ledger and Tresor - offers even more security. No danger of a bank run or risk of insolvent banks suddenly freezing withdrawals or even arbitrarily “taxing” savers on their funds as the world witnessed in 2013 during the infamous bank bail-ins of Cyprus.
Smart Contracts: Processing by smart contract cuts processing time for lending/borrowing services as middlemen are replaced by code. Security is potentially enhanced by the use of smart contracts as well. Auditing of funds may also be improved by the use of smart contracts offering transparency of the process, as code may be easily verified upon examination. In addition, smart contracts may minimize the relative risk of manipulation as human error and arbitrary intervention are greatly reduced.
Decentralized Exchanges: With no need to trust a centralized exchange on a “trustless” platform, counterparty risk is minimized. The responsibility of security on Decentralized Exchanges - or DEXs - is minimized as individuals hold and manage their own private keys to their funds. As operations are automated through smart contracts, lower - and even no - transaction fees are possible. In addition, a greater diversity of trading pairs is possible through the use of Decentralized Exchanges for access to more profitable trades.
Borrowing/Lending Platforms: Lending, collateralizing, and borrowing via blockchain-based decentralized platforms make instant settlement possible as the process is automated and streamlined. Simplified credit checks and the potential to build credit by building a transaction history - thereby establishing a “financial identity”- are more benefits. DeFi lending platforms enable access to a greater number of potential lenders globally, creating an alternative to existing microfinance platforms with added speed, security, and inclusion through the use of smart contracts and decentralization.
Innovative new decentralized platforms are now entering the world of finance. Many promise a transformation of traditional finance as we know it. DeFi is now proving to be the star of the moment with the potential of even more opportunities for the unbanked, creating an open, transparent, decentralized, and inclusive financial infrastructure for the future. Come with us as we at Beyond Enterprizes look into the possibilities before us to make the world a more inclusive and better place.
