More than a year ago, my colleague Michael Kucinsky raised the concern of whether we were ready for Decentralised Finance (DeFi). The benefits of DeFi are evident, including enhanced versatility, availability, transparency and safety of the financial sector. Nevertheless, there are obstacles to overcome. Countries have to incorporate cryptocurrencies on a grand scale and reduce their reliance on cash. As of now, only El Salvador has accomplished this feat by accepting Bitcoin as legal tender.
Michael stressed the urgency of prompt political measures to introduce decentralized finance (DeFi) to the masses, despite the hindrances like safety and user-friendliness. That’s why I keep stressing on the significance of creating awareness about DeFi to bring it to the public’s attention.
It is crucial to take this initiative because decentralization in itself has the capacity to substantially enlarge the financial services sector. We must contemplate this possibility as a plausible consequence.
Typical Financial Obstacles
According to the World Bank, around 33% of the global population lack access to formal financial services. This is a grave concern, especially regarding loans, as numerous individuals cannot secure credit, which can be a pivotal factor in accumulating wealth. The conventional financial system still embodies inequality in brief.
Do you think I am exaggerating the condition? When we look at the present credit rating systems at a national level, it’s hard to imagine how a system that employs inaccurate measures to decide who qualifies for financial prospects can be just. A significant segment of the populace is omitted from this system by and large due to either the lack of identification papers or personal connections.
Unfortunately, this is one of the myriad issues with the existing financial systems. Another substantial problem is the absence of a savings scheme, leaving people to devise their own methods of saving money, which are subjected to the regulations of the financial system, typically resulting in a lower interest rate than the prevailing market rate.
Traditional finance has been notorious for posing several difficulties, including steep fees and inadequate flexibility. Nonetheless, there are other concerns that must not go disregarded. Individuals who select conventional financial resolutions also encounter prolonged, intricate, and bureaucratic procedures, obligatory services and costs, and are deprived of privacy.
Shift in Perspective
I am thrilled to announce that DeFi has the capacity to transform the financial services industry. With the utilization of decentralized applications (dApps) and nodes connected in a vast network, customers and enterprises can now access smart contracts that are self-executing whilst verifying and logging transactions in an unalterable distributed ledger.
It is apparent that this language serves a purpose. Eliminating the requirement for intermediaries and depending instead on a network of self-governing computers to validate financial transactions has the potential to offer the whole system improved transparency and efficacy. This benefits everyone associated.
Decentralization’s primary advantage is its possibility of growth. This is because an individual with a contemporary device can access any of the financial system’s networks and commence transacting money right away. With no screening procedures or regulatory agencies, anybody can become a part and deposit funds or borrow money. The only prerequisite is possessing access to the necessary device. Following that, everyone adheres to the predetermined terms of the relevant smart contracts.
Those aiming to diminish expenses could also profit from decentralization. Decentralized financial networks offer participants the chance to obtain incentives for fulfilling specific obligations, like becoming a Proof-of-Stake (PoS) validator, rather than receiving meager interest payments on their accounts. This could generate cryptocurrency-based passive revenue streams that are more lucrative compared to those offered by conventional financial institutions.
The capacity of DeFi to facilitate heightened access to the financial system for individuals could have a positive impact on the overall economy. A higher number of individuals engaging in the financial system, which propels regional, national, and international markets, could prove greatly beneficial not only for those individuals but also for the organizations and governments catering to them.
Prospects of Future Success
Michael anticipated in his article that the DeFi ecosystem holds the potential of becoming the forthcoming banking sector. Considering that the public viewpoint regarding cryptocurrencies and decentralized finance has significantly altered, this potential future seems more feasible than ever before. It seems like a promising future.
The political discourse has not transpired yet, so I am referring to the time ahead. But, should we just wait for it to unravel? Definitely not! There are still elements of DeFi that require refinement, specifically concerning infrastructure expenses, intricate systems, and comprehensive risk management. Furthermore, we must make an effort to integrate the DeFi experience itself, which may seem obscure and intricate at times.
If we wish to advance the financial services industry, it is crucial that we move beyond solely striving for economic growth. It is imperative that we adopt a people-centric approach to guarantee that individuals have increased possibilities and fewer hindrances to entry. This is a matter of tremendous importance that demands further reflection, but it seems that decentralization is the remedy.