Decentralized Finance (DeFi): There are a myriad of misconceptions about decentralized finance that have contributed to a widespread misunderstanding of what this technology truly is. Many people falsely accuse this emerging industry of being an opaque set of systems that serves as a means to make the rich richer while enticing retail investors to gamble their money away. However, this could not be further from the truth.
The true promise of decentralized finance is its capability to make financial systems transparent and open source. This is while removing barriers to access, empowering scores of people who have been excluded from the current banking system.
In recent weeks, the market has seen centralized financial institutions in the crypto space collapse due to their inability to successfully bridge decentralized financial tools and a centralized financial model. Despite these failures, truly decentralized finance is looking as strong as ever. That does not change the fact that these were disappointing results that have left many people in a vulnerable position, wondering when they will be able to 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 corporations in a perfect world, would invest, lend, stake 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 the way they conduct their business, and customers must put their trust into the people running the corporation to safely handle their assets.
This lack of clarity between institutions and their customers has been an issue, especially for the most vulnerable, since their inception. We have seen the consequences time and time again. The 2008 Global Financial Crisis in particular, is one catastrophic series of failures that affected people globally. 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 underbanked citizens of the world. According to a study conducted by Global Findex, approximately 1.7 Billion people worldwide do not have access to a bank. High fees and opening minimums are cited as being reasons amongst the unbanked for the inability to open accounts and engage in the current system. These issues, paired with distrust of the banking system, typically due to a lack of transparency regarding fees and deposit timing, also contribute to the problem. As a result, the unbanked and underbanked are left to use means such as prepaid debit cards, money orders, check cashing or payday loans. These often have high-cost fees, thus perpetuating a vicious cycle of economic inequality.
Cryptocurrencies and decentralized financial technologies offer a new way for these vulnerable populations to gain access to financial tools without the traditionally high barriers of entry. Decentralized finance is run by open sourced algorithms, not people, nullifying any sort of socio-economic barriers that stand in the way of underserved populations and traditional banks. Cryptocurrency and DeFi protocols can be a viable option for those who face 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 for all people regardless of socioeconomic status.
Cryptocurrencies and DeFi offer an alternative
Another tremendous benefit on top of this unprecedented level of transparency and accessibility, is the ability for users to directly participate in the governance of these systems through Decentralized Autonomous Organizations, otherwise known as DAOs.
Decentralized governance allows the people who use the protocols to play a vital role in all decision-making processes. Through community forums and on-chain voting mechanisms made possible by smart contracts, not only can users feel more confident in understanding the financial technology they are utilizing, but they can also play a role in the 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 into the hands of the people, and takes it out of the hands of any corporate board of directors dependent on profiting off 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 poverty cycle in a truly sustainable way. Decentralized financial technologies are the tools that people can use to break the systemic chains that have held them down for far too long.
About the author
Wil Barnes is the Co-founder of Jet Protocol. Previously solidity developer for MakerDAO and ConsenSys.
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