Decentralized Finance (DeFi): There are a myriad of misconceptions about decentralized finance that have contributed to a widespread misunderstanding of what this technology really is. Many people wrongly accuse this emerging industry of being an opaque set of schemes that serve to enrich the rich while enticing retail investors to gamble their money. However, that couldn’t be further from the truth.
The real promise of decentralized finance is its ability to make financial systems transparent and open source. While removing barriers to access, empowering dozens of people who have been left out of the current banking system.
Over the past few weeks, the market has seen centralized financial institutions in the crypto space crumble due to their inability to successfully link decentralized financial tools and a centralized financial model. Despite these failures, truly decentralized finance looks stronger than ever. That doesn’t change the fact that these were disappointing results that left many people in a vulnerable position wondering when they’ll be able to get their money back. But CeFi’s failures are not DeFi’s failures.
Decentralized Finance and Obstacles to Wealth
Centralized entities, even in crypto or any other company in a perfect world, would invest, lend, gamble and collect returns without having huge holes in their balance sheets that require mergers and acquisitions by larger entities and providers of cash to repair. Unfortunately, these institutions are not transparent in the way they conduct their business and clients have to trust the people running the company to manage their assets securely.
This lack of clarity between institutions and their clients has been a problem, especially for the most vulnerable, since their inception. We have seen the consequences time and time again. The 2008 global financial crisis, in particular, was a catastrophic series of failures that affected people around the world. But on a daily basis, the most economically vulnerable are subject to a multitude of barriers that permanently inhibit their ability to build up and maintain a heritage.
Decentralized finance and unbanked citizens
There is an incredibly large population of underbanked citizens in the world. According to a study conducted by Global Findex, approximately 1.7 billion people in the world do not have access to a bank. High fees and opening minimums are cited as reasons among the unbanked for the inability to open accounts and engage with the current system. These problems, coupled with mistrust of the banking system, usually due to a lack of transparency regarding fees and deposit times, also contribute to the problem. As a result, the unbanked and underbanked must use means such as prepaid debit cards, money orders, check cashing, or payday loans. These often have high fees, thus perpetuating a vicious circle of economic inequality.
Cryptocurrencies and decentralized financial technologies offer these vulnerable populations a new way to access financial tools without the traditionally high barriers to entry. Decentralized finance is run by open-source algorithms, not people, breaking down all sorts 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 in the banking system. With everything online, anyone with internet access can open a cryptocurrency wallet, and access is 24/7, making these tools extremely accessible to anyone, no matter what. regardless of their socio-economic status.
Cryptocurrencies and DeFi offer an alternative
Another huge benefit, in addition to this unprecedented level of transparency and accessibility, is the ability for users to participate directly in the governance of these systems through decentralized autonomous organizations, also 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 enabled by smart contracts, not only can users feel more confident in understanding the financial technology they are using, but they can also play a role in the processes of decision-making that will inevitably affect how they interact with the platform.
This innovation is unprecedented in the traditional financial world, as it places power directly in the hands of the people and removes it from the hands of any corporate board of directors dependent on the profit of the people.
Breaking down 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 cycle of poverty in a truly sustainable way. Decentralized financial technologies are the tools people can use to break the systemic chains that have held them back for 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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