DECENTRALIZED FINANCE
By Ehis Omozusi on The Capital
After the global recession of 2008, financial services have been viewed as one of the least trusted industries. With a total of 1.7 billion people who currently lack access to financial services, the current global financial system has proved to be inefficient in multiple aspects. Sub-Saharan Africa accounts for seventeen percent of the global unbanked population. A study made by a PWC analyst, claims that 45% of financial intermediaries like money transfers and stock exchange suffer from serious cybercrimes every year, leaving the public at a financial loss and data exploitation.
Decentralized finance, also known as DeFi, is an alternative to the traditional financial system. DeFi refers to an ecosystem of financial applications that are built on top of public blockchain networks like Conflux, Bitcoin, and Ethereum. This financial system is not controlled by a single person or entity. DeFi aims to create an open-source, permissionless, and transparent financial service ecosystem, which is built to be accessible by everyone and without any central authority. The users will have full control of their assets and will be able to interact with the ecosystem through decentralized apps (DApps) and peer-to-peer like LocalBitcoins or torrent files.
The Possible Impact of Decentralized Finance in the African market
1. Global Access to Financial Services
With decentralized finance, anyone with an internet connection and a smartphone could access these services. There are a variety of limitations that prevent access in the centralized system: Credit history, Lack of citizenship, limitation in status, exorbitant funds required to access financial services, or distance from functioning economies and financial service providers.
2. Unaffected by unstable governance and corruption
In a decentralized financial system, the data is recorded on the blockchain and spread across thousands of nodes, making the potential shutdown of a service a complicated undertaking.
Some countries in Africa with poor and unstable governance, leave its citizens in a paranoia state of not being able to properly forecast investment options, these citizens can trust decentralized financial system to protect their wealth. For example, Kenya already adopts the use of blockchain technology for their elections.
3. Affordable Cross-Border Payments
Decentralized finance removes costly intermediaries to make remittance services more affordable for the global population.
For example: As of 2018, Nigeria’s remittance from its citizens in diaspora rose to $17.57 billion, which is a 210% increase from the figure recorded as of 2013.
In the current system, it’s very expensive for people to send money across borders: the average global remittance fee is close to 9% or even higher in some African countries. With decentralized financial systems, the remittance to any part of the world will be about seven times faster, and the charged fees could drop as low as 3%, this should increase the money being remitted.
4. Privacy and Security
In decentralized finance, users have control of their assets and can transact securely without validation from a central party.
Possible Risks ahead for Decentralized Finance?
Adaptation: As any new product will have sensitizing and educating the potential users is paramount, the same applies to DeFi, people will require to be educated and be shown the advantages decentralized finance offers as against the traditional financial system. According to a report published by the Cambridge Centre for Alternative Finance in December 2018, there are 25 million verified crypto users worldwide, campaign this against the 1.7 billion unbanked population and underbanked population. It shows the magnitude of the work still to be done.
Scalability: If and when DeFi is able to get the population, it wants to adopt this new technology, the question of scalability will arise. Can we meet the demand the traditional method is meeting now? Visa processes approximately 17,000 transactions per second as against the current throughput of 7 and 15 transactions per second for Bitcoin and Ethereum respectively. More protocols like Conflux are springing up to address this issue, but there’s still a lot of work to be done in addressing the issue of scalability.
Conclusion
This article aims to highlight the positive attributes Decentralized Finance could possibly bring to Africa and not mar the traditional financial ecosystem. In fact, the fastest and most effective way for the adoption of DeFi is to come in conjunction with the traditional financial system and co-exist. There are countless governments with conflicting attitudes towards crypto and blockchain. Countries like India have banned digital currency entirely. The co-existence will help with favorable regulation for the blockchain ecosystem, which will further boost the awareness of DeFi, and also increase its users.
web: confluxnetwork.org
