What is Defi, and Why Does it Matter?
According to the United Nations, about 8 billion people live in the world, and this number is likely to grow further in the coming years, reaching the 10 billion mark in the next three decades. More alarming than the demographic forecasts suggest is the number of people below the poverty line who live on less than $1.90 a day or the 690 million people who go hungry every year.
Considering that at least 1.7 billion adults (about 20% of the world’s population) are unbanked, as reported by the World Bank, it is no wonder that poverty continues to be perceived as one of the biggest threats to social and economic development around the globe.
The roots of poverty are everywhere: in wars, in slavery, in totalitarian and supremacist regimes, regardless of the ideologies that supported them. Poverty can be seen on the streets, in Hollywood’s best movies, in theater plays. For the curious and scholars, there is no lack of reference books on the subject.
However, few dare to report the shortage of access to financial services as one of the biggest obstacles to poverty eradication. Niall Ferguson, the controversial Harvard University history professor, is an exception.
In The Ascent of Money, a New York Times Best Seller, Ferguson states “that poverty is not the result of rapacious financiers exploiting the poor. It has much more to do with the lack of financial institutions, with the absence of banks, not their presence.” And to support his argument, Ferguson goes on with the following explanation: “Only when borrowers have access to efficient credit networks can they escape from the clutches of loan sharks, and only when savers can deposit their money in reliable banks can it be channeled from the idle to the industrious or from the rich to the poor.”
Exaggerations aside, let’s put Ferguson’s words into context with caution before any unfair or biased criticism. A not-so-distant past is ready to reveal the truth.
Banks’ reputations are well known and stay far from being the best. During the 2008 financial crisis, Western banks experienced the biggest collapse since the Great Depression; thousands of people lost their jobs, homes, and savings. Bankers remained billionaires, while many were driven into poverty.
On the other hand, the lack of access to financial services is a critical issue that undermines freedom of choice, individual and collective growth.
The problem, though, is not the absence of banks but the difficulty of people gaining access to a system that penalizes the “less fortunate”, condemning them in advance to welfarism or, at worst, to slavery disguised as solidarity.
Nevertheless, banks are an essential part of the economy. When barter was the primary medium of exchange, the principal difficulty was finding someone who had the goods and services that both were willing to trade. This phenomenon, known as the double coincidence of wants, generated an unfair economic system.
If, for example, one party wanted to exchange beans for coats, the exchange would only occur if the coats’ owner had an interest in the beans. The latter, in turn, could offer one single garment for an entire crop of beans. In the absence of a means to calculate the value of goods and services, the barter system dictated the economic model for centuries.
With the emergence of money, this problem was “solved”, but not completely. In the lack of a banking system, money would not get into people’s hands. Only then was it possible to assign value to products, and trades became less susceptible to the inconsistencies of a market based essentially on this primitive economic system. A brief pause for breath is enough to acknowledge that this is far from the truth.
Those billions of people who earn a miserable amount of money daily, the unbanked adults, and the millions who are, in advance, annually condemned to starvation do not know any other system other than benevolence or barter. This is where Defi comes into play.
Unbanked, but not unDefied
Defi, or Decentralized Finance, is a set of emerging financial services based on blockchain technology. These services are similar to what a bank offers, except that there is no centralized institution to intermediate any transaction.
With Defi, the possibilities are endless. Imagine all that a traditional bank can offer: loans, borrowings, investments, savings, combined with the convenience of obtaining a range of other services and products without the need to be assessed by an account manager with a pleasant smile and an insatiable desire to grab a slice of your earnings.
Unlike a bank, where you need at least a reasonable income to open an account, which inhibits many families from obtaining financial services, Defi apps are accessed with a PC or Smartphone through a digital wallet. Is it that simple? Unfortunately, not yet.
The Good and Bad News
While a World Bank survey indicates that 1.1 billion adults without a bank account have a smartphone and can use some financial services through digital apps, most prefer to use cash.
Interestingly, the resistance to digital banking and financial services is not in the ability to use the smartphone for such purposes (although this is a problem), but in the bureaucracy and high fees to maintain a bank account. So, those people deprive themselves of savings and services that would benefit them and future generations. Defi can do better, and this is the good news.
The bad news is that you have to be almost an expert in cryptocurrencies, finance, and technology to use a Defi platform. Until these platforms become more accessible to the population, only investors and crypto enthusiasts will benefit from this market’s opportunities.
Defi is a trend on the verge of becoming mainstream, a financial innovation to alleviate poverty and provide dignity to people, the present and future of finance, and hope for the markets. Defi is everything a traditional bank never dreamed of being. Defi is Bitcoin, Ethereum, cryptocurrency, and decentralization.
Defi is Defi.
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