As controversial as the mention of the word Decentralized finance ( Defi) is to the legacy of the current financial ecosystem in Africa. The opportunities it presents especially to the young and tech-savvy population who are in dire need of an alternative financial system besides the current centralized one can’t be overemphasized.
What is Decentralized Finance?
DeFi is a general term used for decentralised financial services which include decentralised exchanges and decentralised money market. The new digital financial system aims to replace the current centralized financial services.
Cryptocurrency and the blockchain sector are responsible for disrupting financial intermediaries in such a way that it is capable of accomplishing what was once impossible in the traditional money market.
Decentralised financing describes a brand-new financial system that is designed on public blockchains such as Bitcoin as well as Ethereum since both digital assets are a foundational open-source network that could be used to alter how the global economy operates. For instance with decentralised finance one can pay for goods and service without interference from intermediaries while, in the current system, a financial institution sits between the user and owner of the goods, and as such has the authority to continue, stop or even pause a transaction.
One of the primary benefits of Decentralised Finance is that it erases all intermediaries from all transactions.
In traditional finance set up, the whole monetary control is in the hands of a few people or organizations, which includes the policy-making, issuance of currency, determining rates of interest and even controlling inflation. On one hand, this may seem good, but a few people who have the expertise can decide what actions to take that are in the best interest of the public, however, with that comes several flaws.
For instance, many steps can be taken to kick start a dying economy, but a small group of people behind closed doors may prefer to take the fastest route which can lead to decision-makers taking steps that could potentially erase the wealth of millions of people in a nation. Such is the case of Venezuela, where a few poor policy choices led to inflation of over 10 million per cent, the inflation was so high that many people witnessed their hard-earned savings become worthless in a matter of days.
Here are 5 ways in which decentralized finance can impact the world
Broder Accessibility to Finance Services: With decentralized money, an individual with an internet-enabled phone could have access to financial information in such a way that a top trader at a financial firm would have the same level of access as a farmer in a remote part of any country.
Affordable Cross-Border Payments: With decentralized finance, expensive intermediaries are completely erased making remittance services more affordable for everyone. In the current system, it’s extraordinarily expensive for people to send money across the border because sending remittances costs an average of 6.51 per cent of the amount sent. Through decentralized financial services, remittance fee can be reduced to as low as 3 per cent.
Access to Privacy and Security: In decentralized finance, users are in charge of their funds and can perform any transaction without validation from a central source. But in the current systems, custodial institutions put people’s wealth and information at risk if they fail to secure it.
Censorship- Resistant Transactions: In a decentralized financial setup, purchases are unalterable and also blockchains can not be controlled by central institutions like central banks or government. In countries with poor decision-makers, citizens can divest to the decentralized financial system to protect their wealth. For instance, Venezuelans have adopted Bitcoin as an alternative investment to protect their wealth from government regulation and manipulation.
Granting Access to the unbanked and underbanked: The most significant impact of DeFi is the financial inclusiveness it offers to the unbanked by providing global access to financial services that are only available to the wealthier population. This cutting-edge innovation powered by FinTech can be utilized by any person with an internet-enabled phone. For instance, in a decentralized system, a man in a remote part of a country could receive a loan from the US, pay off his debt and purchase a home, through all-in-one interoperable apps.
Though DeFi still has a long way ahead, the technological process that will take over the current centralized finance hasn’t been perfected. On a positive note, with the right innovative step the hopes of over 1.7 billion people, especially the unbanked who are in dire need of an alternative banking solution will be met. Decentralised Finance has all it takes to be the great leveller, granting everyone an equal opportunity to recover and build a better financial future for ourselves.
