Decentralized Finance (DeFi) – There are a lot of misconceptions about decentralized finance that have contributed to a widespread misunderstanding of what this technology really is. Many people falsely accuse this emerging industry of being an opaque set of systems that serves as a means to enrich the rich while attracting retail investors to gamble their money. However, this couldn’t be further from the truth.
The real promise of decentralized finance is its ability to make financial systems transparent and open source. This is while removing barriers to access, empowering dozens of people who have been excluded from the current banking system.
In recent weeks, the market has seen centralized financial institutions enter the crypto space. to collapse due to its inability to successfully marry decentralized finance tools and a centralized finance model. Despite these failures, truly decentralized finance looks as strong as ever. That doesn’t change the fact that these were disappointing results that have left many people in a vulnerable position, wondering when they will get their money back. But the failures of CeFi are not the failures of DeFi.
Decentralized finance and barriers to wealth
Centralized entities, even in crypto or any corporation in a perfect world, would invest, lend, gamble and collect yield without having huge holes in their balance sheets that require mergers and acquisitions by larger entities and liquidity providers to fix. Unfortunately, these institutions are not transparent with how they conduct business, and clients must place their trust in the people running the corporation to handle their assets safely.
This lack of clarity between institutions and their clients has been a problem, especially for the most vulnerable, since its inception. We have seen the consequences time and time again. The global financial crisis of 2008, in particular, is a catastrophic series of failures that affected people around the world. But on a daily basis, the most economically vulnerable are subject to a multitude of barriers that constantly inhibit their ability to build and maintain wealth.
Decentralized finance and unbanked citizens
There is a staggeringly large population of world citizens who are underbanked. According to a study conducted by Global Findex, approximately 1.7 billion people in the whole world do not have access to a bank. High fees and opening minimums are cited as reasons among the unbanked for their inability to open accounts and participate in the current system. These issues, along with distrust in the banking system, usually due to a lack of transparency regarding fees and timing of deposits, also contribute to the problem. As a result, the unbanked and underbanked are forced to use means such as prepaid debit cards, money orders, check cashing or payday loans. These often have high-cost fees, perpetuating a vicious cycle of economic inequality.
Cryptocurrencies and decentralized finance technologies offer a new way for these vulnerable populations to gain access to financial tools without the traditionally high barriers to entry. Decentralized finance is run by open source algorithms, not people, overriding any kind of socio-economic barriers that stand in the way of underserved populations and traditional banks. Cryptocurrency and DeFi protocols may be a viable option for those facing racial discrimination and class bias from the banking system. With everything done online, anyone with internet access can open a cryptocurrency wallet, and access is 24/7, making these tools tremendously accessible to everyone, regardless of their socioeconomic level.
Cryptocurrencies and DeFi offer an alternative
Another tremendous benefit in addition to this unprecedented level of transparency and accessibility is the ability for users to directly participate in the governance of these systems through Decentralized Autonomous Organizationsalso known as DAO.
Decentralized governance allows the people who use the protocols to play a vital role in all decision-making processes. Through community forums and chain voting mechanisms made possible by smart contractsusers can not only feel more secure in understanding the financial technology they are using, but can also play a role in decision-making processes that will inevitably affect how they interact with the platform.
This innovation is unheard of in the traditional financial world, because it puts power directly in the hands of the people and takes it out of the hands of any corporate board of directors that depends on the profits of the people.
Breaking down the barriers between vulnerable populations and their access to wealth is a key step on the path to creating a better world. Empowering underserved communities is the most effective way to lift people out of the cycle of poverty in a truly sustainable way. Decentralized finance technologies are the tools that people can use to break the systemic chains that have kept them at bay for too long.
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