DeFi for Banking The Unbanked. For people staying in… | by Vishal Muktewar | April 2022

By pikisuperstar from freepik

For people staying in developed countries, thinking of carrying out day-to-day transactions without the need for banking services is next to impossible. He has an influence and control over their lives that promises to provide them with financial stability. But for developing and underdeveloped countries, where most low-income people reside, access to a bank account is not easy.

Due to the strict rules imposed by traditional financial institutions, many find it difficult to access a bank account. In fact, according to a World Bank Index report titled “The Findex Global Database 2017”, approximately 1.7 billion adults in the world are unbanked. While most people living in developing or underdeveloped countries contribute to the unbanked, there are also sometimes people in developed countries who do not have access to a bank account due to the strict framework of the system. banking.

Since unbanked people do not have access to a bank account, they find it difficult to obtain loans, make transactions, etc. This only makes their situation worse. So the question is, is there a way to solve the problem?

Decentralized finance (DeFi) is currently experiencing unprecedented growth. It represents the evolution of financial systems that will disrupt the way billions of people interact with money, regardless of their access to the current financial system. While those in developed countries see it simply as an extension or improvement of the current financial ecosystem, they are ready to offer a promising future for the underdeveloped and unbanked.

What is DeFi?

Decentralized finance, commonly referred to as DeFi, is an industry that leverages blockchain technology, particularly Ethereum, to cut out middlemen such as traditional financial institutions. It allows transactions to be carried out without the involvement of third-party lending, peer-to-peer (P2P) and a wide range of financial services.

DeFi aims to democratize finance for all by replacing central institutions (like banks) with decentralized alternatives that provide access to everyone. Although it sounds too good to be true, it is not impossible.

Why consider using DeFi?

With a decentralized financial system developed on the public blockchain framework, everyone can easily access financial services wherever they are, regardless of their demographics. Additionally, DeFi solutions are mostly automated and can operate seamlessly 24/7, unlike their traditional, centralized counterparts. Additionally, people can transact at any time, and those transactions are processed at a much faster rate than their traditional financial institutions offer.

The automated nature of DeFi services means that DeFi solutions can be much cheaper than traditional financial services. Therefore, one can consider DeFi as a technology similar to conventional monetary systems in terms of services but superior to the banking process.

DeFi allows an individual to obtain microloans or make microinvestments since no money is required to grant a loan. Its infrastructure spreads the risk associated with the loan among multiple individual investors who funded it, thereby removing the requirement for one entity to bear the financial risk. This is particularly useful for the unbanked entrepreneur residing in a developing country, who can use DeFi to create a decentralized lending pool to obtain funding for their cryptocurrency projects from investors residing around the world. entire.

DeFi undoubtedly has attributes that can take the traditional financial framework, but it still hasn’t caught on or gained popularity. Why?

DeFi is not without drawbacks

While many in the blockchain community are diving head first into DeFi, they still represent only a fraction of the global population. Moreover, the DeFi sector is still in its infancy and only a few DeFi products are usable and available in the market.

While DeFi has left its mark on the financial industry, as evidenced by its market capitalization, which at present stands at $133.3 billion, according to CoinMarketCapthere are still a few downsides that linger.

The smart contracts that power the DeFi ecosystem by offering advantages over traditional financial institutions are not error-free. Therefore, developers should be extremely careful. If they do not verify them properly, they can lead to significant financial losses.

Another major factor is the lack of awareness and education about the DeFi space among the general population. Even people in developed countries still find it difficult to grasp the technology and its use. If anyone really hopes to “bank the unbanked,” it is essential that the unbanked be aware of the solutions to their ongoing financial problems.

Banking the Unbanked — Conclusion

DeFi solutions enable the unbanked population to break down the walls built by traditional financial institutions that prevent them from accessing financial services. It allows everyone to access and interact with financial services on a global scale. It can empower nearly 1.7 billion unbanked people to transact at a fraction of the cost, increasing global prosperity and wealth and slowly eliminating financial inequality.

Undoubtedly, DeFi helps to increase autonomy and transparency by eliminating intermediaries. But the technology is still in its infancy and may come with increased risks, which are currently much higher compared to established FinTechs or financial institutions today.

While not yet perfect, DeFi gives the unbanked a glimpse: a bright future awaits them.