Democratizing financial solutions for all tends to be the northern light for many new
cryptocurrency projects. Our society does a great job of finding out what is not working and
developing a technology that will help all, not just a few influential individuals in Washington in
tandem with the help of the FED. DeFi will substantially evolve how traditional commerce is
carried out for many reasons. These reasons include reducing the amount of unbanked/
underbanked, equitable access to financial services, access to permissionless financial products,
and the lack of central control by for-profit companies.
First, what is DeFi? It is a movement whose mission is to decentralize standard financial services
(e.g. borrowing, investment, trading, payments, and more). Below, I showcase an example
(borrowing and lending) of how it works, alongside how it will transform traditional commerce
and lastly, I go over some current obstacles DeFi needs to overcome.
Democratizing payments solves many problems that traditional financial services has not
solved. For example, many people in our society are either unbanked or underbanked and do
not have the same access to financial services as other individuals. From a Report on Economic
Well-Being from 2018 to 2019, 21% of U.S. citizens are Unbanked or Underbanked[1], which
leads to approximately $68.9M of the U.S. population facing financial challenges when it comes
to getting access to traditional financial services and products.
Decentralized finance aims to make it, so payments are available to anyone in the world no matter what income level, net
worth, minority group, or where one is located. If one has an internet connection, they can
participate in today’s modern, fast, transparent, secure, and forward-thinking DeFi world.
While much of the world still doesn’t have a reliable/consistent internet connection, this is
continuously being reduced and thus allowing citizens to participate in this new global financial
system. This new financial system is not just limited to peer to peer payments, but it also
expands into other areas in which individuals use financial services or products. These include,
through smart contracts, everything from high-interest savings accounts, loans, asset trading,
asset management, staking, tokenization, derivatives, insurance, and more.
Ethereum is the primary blockchain for smart contracts, but Tezos is another large competing
DeFi project that has been gaining momentum in the past couple of years. On these
blockchains, developers have created smart contracts which are essentially hard-coded
contracts in which certain conditions are or are not met. There is no ambiguity or
misinterpretation as there may be in the standard court of law. For example, let’s say a
borrower defaults on a loan that they took out with a smart contract. Depending on the terms
of the smart contract, if he misses a few consecutive payments, the collateral the borrower put
up will automatically go to the lender due to their failure to uphold the contract. How the
contracts are written is almost completely airtight and does not execute until the initial
conditions are met, which helps mitigate risk for lenders, insurance companies, investors, and
more.
These smart contracts (often referred to as DeFi apps/DAPPS) are not centralized and managed
by any for-profit institution, bank, etc. They are essentially rules that are written into code by
the developers of the given project. Since there is no centralized institution managing the smart
contract there is reduced bias on any individual or organization. Since the code is visible for
anyone to see, if there are any bugs/issues with contracts or anything, developers working on
the project can implement updates if necessary. The power is in the hands of those using the
protocol, rather than a for-profit institution looking to maximize profits for themselves.
There are some noteworthy obstacles in the way of DeFi taking over as our new financial
system. Foremost, many people in the world do not have internet access. Specifically, 19 million
Americans do not have an internet connection[2], and worldwide, there are 3.22 Billion people
who do not have access to the internet.[3] Many of the individuals who are under/unbanked
are those who are poor, and can not afford internet, or maybe in an area of the world that is
more rural and has a less developed infrastructure. These very people that would stand to
benefit the most from DeFi, cannot access the platforms/networks to participate. Next, as DeFi
is currently in its infancy, there are still rare cases where there have been flaws in the code of
smart contracts, and if this were to occur it could cause a contract not being executed properly
or, the worst case, a loss of funds overall[4]. Next, while there aren’t financial institutions
running DeFi projects, developers are. It can be more challenging to assess the motives of a
developer/team as much as we can assess the motives of a financial institution (especially
those publicly traded). The developers have a large amount of control of the code. Even with
proper voting on the network, there is always the potential for missteps. Finally, not pertinent
to just DeFi, but many governments around the world have or are putting regulations in place
to limit their citizens’ access to DeFi, due to lack of control. While it is unfortunate, this is a
reality that DeFi is facing and is something that can impede its full potential.
There are numerous benefits to DeFi that we have already seen, and even more beneficial use
cases to come. With billions of dollars moving in, many individuals, critics, and institutions alike
witness how this can revolutionize the world we live in. While it is not without its flaws, these
issues are continuously being worked out by talented teams who aim to make the financial
world more permissionless, secure, and less controlled. With the erosion of trust amongst the
FED policies, and for-profit financial institutions’ antiquated ways of finance, the future holds
many pros for DeFi, and it will change the way humans transact for the better.
References
[1] https://www.federalreserve.gov/publications/2019-economic-well-being-of-us-households-
in-2018-banking-and-credit.htm
[2] https://www.fcc.gov/reports-research/reports/broadband-progress-reports/eighth-
broadband-progress-
report#:~:text=Notwithstanding%20this%20progress%2C%20the%20Report,lack%20access%20
to%20this%20service.
[3] https://www.statista.com/statistics/617136/digital-population-worldwide/
[4] https://news.bitcoin.com/DeFi-protocol-bzx-loses-8-1-million-in-third-hack-this-year/
Disclaimer
Disclaimer: Nothing stated in this video is a recommendation from PieceofPaul to buy or sell a particular security or asset class. You should wisely consider your tolerance for risk, time horizon, and financial goals before making an investment. With investing, you run the risk of losing money, always read an investment prospectus and make an informed decision before allocating capital to a particular investment.
