DeFi — “decentralized finance” — is all the rage.
In this post, we’ll look at three ways DeFi is making the world a better place.
Banking the Unbanked
According to the World Bank’s Global Findex database, some 1.7 billion people — about a third of the world’s population — are unbanked. That is to say, they lack accounts at banks or with mobile money providers.
Most of the unbanked live in the the developed world:
“Because account ownership is nearly universal in high-income economies, virtually all unbanked adults live in developing economies. China and India, despite having relatively high account ownership, claim large shares of the global unbanked population because of their sheer size. Home to 225 million adults without an account, China has the world’s largest unbanked population, followed by India (190 million), Pakistan (100 million), and Indonesia (95 million). Indeed, these four economies, together with three others — Nigeria, Mexico, and Bangladesh — are home to nearly half the world’s unbanked population.”
Even in the relatively wealthy developed world, there are large numbers of unbanked. According to the U.S. Federal Reserve, 22% of adults in the United States are unbanked or underbanked. That’s 63 million Americans.
Blockchain-based DeFi networks potentially grant the unbanked access to financial services — provided they have an internet connection
“With a simple internet connection on a smartphone this network can be equally accessed by anyone. And because a blockchain database is censorship resistant, identity or work history managed with a blockchain cannot be lost.
At the same time someone connected to, for instance, the Bitcoin network, hereby gains access to an international payment system. With instant micro payments to anyone on the planet in a matter of minutes. Micro loans, micro insurance, binding contracts are all possible with blockchain technology and are being built on Ethereum. It’s easy to create a blockchain wallet and accessible by means of smart contracts. Now this provides us true financial freedom and equality. A true use case of DeFi.”
One of the more interesting use cases in this space is Goldfinch Financial, which offers loans without collateral. This opens up banking to an even larger segment of the unbanked. The service has already deployed USD 1 million in capital to thousands of borrowers across Mexico, Nigeria, and Southeast Asia.
Indeed, Goldfinch Financial removes one of the chief impediments the unbanked face — namely, even if they had access to a bank, they have no money to save or invest:
“Some blockchain projects based in the U.S. and Asia are positioning themselves to promote DeFi services in Africa and there is a small group of local, African DeFi enthusiasts. Although DeFi is likely to face great regulatory challenges as it grows globally, there is nothing inherently wrong with offering alternative financial products in environments with minimal banking access. But despite DeFi’s innovation, its technology is much more difficult for the layman to use than traditional money services. And it is not designed to remove the main cause of being unbanked or underbanked in the first place: not having enough income.”
Cryptocurrency and fintech have particularly taken off in Africa, where there are some interesting local DeFi solutions either on the market or in development.
One of these is Xend Finance, a Nigerian DeFi startup that lets credit unions, cooperatives and individuals earn higher interests in stable currencies on their savings. And in countries with volatile currencies, those stable coins are a lifesaver. Speaking to TechCrunch, founder Aronu Ugochukwu explained:
“We’ve experienced three massive currency devaluations in the last three years in Nigeria, and this is similar to different economies in the world with unstable economies,” Ugochukwu said to TechCrunch. “My mother and I belong to different cooperatives where we save and make monthly contributions to help one another in the cooperative. Realizing that despite saving regularly, we were losing more value for our money. This gave birth to Xend Finance.”
OK, digital IDs are not strictly DeFi, but they definitely interact.
Digital IDs increase the level of trust in DeFi platforms, and moreover, they help them become compliant with increasingly pervasive KYC regulations.
Digital IDs also serve important social implications. According to the World Bank, about 40 percent of people in low-income countries lack proof of identity. And this presents major problems:
“From a development perspective, access to government recognized identity credentials matters because exercising one’s rights and accessing basic services and economic opportunities often require official proof of identity.”
Digital, self-sovereign IDs allow people without access to traditional government-issued IDs to prove who they are.
DeFi Gaming? Seriously?
Yes, DeFi gaming is apparently a thing. From VentureBeat:
Blockchain-based games, or DeFi games, are games that utilize blockchain-based cryptography. As Adrian Krion described for Nasdaq earlier this year: “The mechanisms of DeFi enable blockchain games to provide players with different ways to make it worth their while and earn rewards. This growing proliferation of monetary benefits is a point of growing interest.”
DeFi games are growing increasingly popular as they allow users to “earn as they play” buying, selling and trading unique assets.
A documentary over at YouTube looks at how people in one rural community in the Philippines turned to the NFT game Axie Infinity to earn money during COVID-19 lockdowns. From CNBC:
“What matters is having money so we can eat, avoid debts and get through every day. It sustained our daily needs, paid our bills, and debts,” said a mother of three in the documentary. “I was thankful to Axie because somehow it helped us.”