For people staying in developed nations, thinking about doing day-to-day transactions without the need for banking services is nearly impossible. It has an influence and control over their lives that promises to provide them with financial stability. But for the developing and underdeveloped nations, where most of the low-income people reside, getting access to a bank account is not easy.
Due to stringent rules placed by traditional financial institutions, many find it challenging to get access to a bank account. In fact, as per a report from the World Bank Index titled “The Global Findex Database 2017,” around 1.7 billion adults across the globe are unbanked. While most people living in the developing or underdeveloped nations contribute to the unbanked people, there are also people in developed nations at times, who do not have access to a bank account due to the stringent banking system framework.
Since the unbanked do not have access to a bank account, they find it difficult to get loans, make transactions, and more. This only worsens their situation. So the question is, is there any way to address the issue?
Decentralized finance (DeFi) is presently witnessing unprecedented growth. It represents the evolution of financial systems that will disrupt the way billions of people interact with money, irrespective of access they have to the present financial system. While those in the developed nations view it as merely an extension or improvement of the current financial ecosystem, they are set to provide a promising future for the underdeveloped, unbanked people.
What is DeFi?
Decentralized finance, popularly referred to as DeFi, is an industry that leverages blockchain technology, specifically Ethereum, to eliminate intermediaries such as traditional finance institutions. It helps to make transactions without the involvement of a third-party, peer-to-peer (P2P) lending and a broad range of financial services.
DeFi aims to democratize finance for everyone by replacing central institutions (such as banks) with decentralized alternatives that provide access to everyone. Although this sounds too good to be true, it is not impossible.
Why considering using DeFi?
With a decentralized financial system that is developed on the public blockchain framework, anyone can readily access financial services no matter where they are, irrespective of their demography. Additionally, DeFi solutions are mostly automated and can seamlessly function 24/7, on the contrary to their traditional, centralized counterparts. Furthermore, people can make transactions at any time and these transactions are processed at a much faster rate when compared to their traditional financial institutions’ offerings.
The automated nature of DeFi services means that DeFi solutions can be much cheaper than traditional financial services. Therefore, one can think of DeFi as a technology that is similar to conventional monetary systems in terms of its services but superior to the banking process.
DeFi makes it possible for an individual to obtain microloans or make micro-investments since no money is required to provide a loan. Its infrastructure distributes the risk associated with the loan among multiple individual investors that financed it, thereby removing the requirement for one entity to take on the financial risk. This is especially helpful for the unbanked entrepreneur residing in a developing nation, who can utilize the DeFi to create a decentralized lending pool to secure funding for her cryptocurrency projects from investors residing across the globe.
DeFi undoubtedly exhibits attributes that can take on the traditional financial framework, yet it has still not become popular or garnered mainstream popularity. Why?
DeFi is not without any drawbacks
While many in the blockchain community are diving headfirst into the DeFi, they still represent just a fraction of the global population. Additionally, the DeFi sector is still in its nascent stage, and there are only a few DeFi products that are workable and available on the market.
While DeFi has made its mark on the financial industry, as one can see from its market capitalization, which at this time of this writing stands at $133.3 billion, according to CoinMarketCap, there are still a few drawbacks that still persist.
Smart contracts that power the DeFi ecosystem by providing advantages over traditional financial institutions, are not free from errors. Therefore, developers need to be extremely careful. If they do not properly vet them, they can significantly cost monetary loss.
Another major factor is the lack of awareness and education about the DeFi space among the general population. Even people from developed nations still find it difficult to grasp the technology and its usage. If someone truly hopes to “bank the unbanked,” it is critical that the unbanked be aware of the solutions to their ongoing financial problems.
Banking the unbanked — Conclusion
DeFi solutions empower the unbanked population to break down the walls built by traditional financial institutions that prevent them from accessing financial services. It empowers everyone to access and interact with financial services on a global scale. It can provide nearly 1.7 unbanked billion people to perform the transactions at a fraction of the cost, thus elevating the worldwide prosperity and wealth and slowly eradicating financial inequality.
No doubt, DeFi helps to increase autonomy and transparency by eliminating intermediaries. But, the technology is still in its early stage and may carry increased risks, which at present are much higher when compared to established FinTech or today’s financial institutions.
While it is still not perfect, DeFi does provide a glimpse for the unbanked: a promising future lies ahead of them.
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