Liquidity pools are the foundation of the DeFi ecosystem. Moreover, it tries to resolve some specific issues that have been bugging the crypto community for a long time.
DeFi- Open to All
How investing in or using DeFi is different from traditional financial product, by being open and accessible to all.
Blockchain technology was developed to improve and optimize legacy technologies. The fundamentals that support the technology are novel and democratic.
Blockchain and cryptocurrencies have so far survived a decade of criticism and scrutiny. And DeFi, the latest offering from a long array of financial products from the crypto industry, is aimed at solving many significant issues related to traditional financial products and tools.
Some of the crucial areas that remained undeveloped or under-developed for a considerable amount of time in the financial industry are:
- Accessibility of financial products for the unbanked population.
- Constraints or inability to use the financial services offered by foreign countries.
- Eligibility criteria that need to be fulfilled by a person in need of finance. These criteria are often demanding for the underprivileged and are governed and controlled by centralized authorities.
According to the most recent report published by the World Bank, 1.7 billion adults around the world are unbanked. Moreover, the report states that just seven countries contribute to 46% of this number. China, India, Indonesia, Pakistan, Nigeria, Mexico, and Bangladesh constitute around 782 million unbanked adults.
Furthermore, the report states that ~41% of adults in these seven countries have taken credit in one way or another. These numbers affirm the fact that large numbers of adults in these developing countries are unbanked, and that even so, many depend on a credit one way or another.
There is an underlying risk evident in this overall scenario. Since the majority of these people do not have a bank account, they are not able to receive formal credit from a bank or reliable financial institution, which in turn drives them to accept credit from other sources, which are often illegal.
These informal credit sources often turn out to be a person’s worst nightmare. The most common problems someone who borrows money through informal channels risk encountering are:
- Higher and volatile interest rates. These rates can even be changed during the lending period at the discretion of the lender, as more often than not, there are no formal agreements.
- Tighter deadlines for repayments.
- Physical threats and violence are also common in the event that a borrower misses an installment.
- The forceful seizing of properties or valuables. Usually, the borrower is forced to submit the documents of properties or some valuable asset as collateral for the loan. Missing some installments or deadlines for repayments can often lead to the forceful seizure of such collateral by the lender.
However, most of these individual borrowers do not have a choice, as applying for a formal loan through an authorized business can be an even more complicated and restricted process. So, what alternative do unbanked adults who are in need of financial support have?
Restriction of Access to Foreign Financial Services
Traditional financial institutions like banks tend to make it difficult for people to have optimal use of their financial services in foreign countries.
Although contrary to common belief, opening an offshore bank account is not that difficult; one can easily compare and open an offshore bank account from an array of choices, using the SelfKey marketplace. The SelKey marketplace can be accessed by downloading the SelfKey identity wallet.
However, the ease of accessing and using an offshore bank account along with your local bank accounts is extremely difficult.
One of the major issues a person with an offshore account would have to face is the hefty fees one has to pay for international wire transfers. Any person who needs to deposit money to offshore bank accounts will have to make use of an international wire transfer. However, international wire transfers are some of the slowest as well as the most expensive services provided by banks.
On average, an international wire transfer will cost you ~US$15 in fees and would take 3 – 4 business days to get processed.
Another reason that is a deal-breaker when using an offshore bank account is the ineligibility of a person to get credit. It is certainly common for a person to depend on a bank for funds through credit. However, it is quite difficult to obtain any sort of credit benefits from an offshore bank unless you have a long-standing relationship with the institution.
For the reasons mentioned above, centralized institutions like banks are continuously making it difficult for an average person to access or utilize the financial services or products offered in a foreign country.
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Eligibility Criteria – A Backbreaker for the Underprivileged
Centralization can be considered the primary driving factor that led to the development of blockchain technology. That is why decentralization is one of the primary characteristics of blockchain. In order for their business to thrive, centralized entities like banks and financial institutions have made the life of a customer difficult for a considerable amount of time.
A customer who is in need of finance will have to pass a variety of eligibility criteria to get the credit. More often, meeting these eligibility criteria are improbable at best. Hence requests for the credit are more frequently rejected than approved.
For an underprivileged person, this rejection can have even more drastic consequences, since a person who is in desperate need of funds will probably opt to seek financial help from unauthorized entities. Such desperation can often result in the worst possible scenarios.
These scenarios are not just applicable for someone who is underprivileged or financially challenged and can happen to any person around the world bar the affluent.
Hence, the eligibility criteria that are stipulated by traditional, centralized banks are only meant to prosper their own business and are not designed to be friendly to an average customer.
This has been the state of the financial industry for decades, and a change is long overdue.
DeFi: Byproduct of an Inevitable Change
It will be fair to identify the introduction of blockchain and cryptocurrency as a result of this inevitable change in the finance industry. And DeFi or Decentralized Finance can be considered the byproduct of this change.
Cryptocurrencies initially solved several problems in the financial industry, and DeFi is the endgame of these changes. DeFi is decentralized, without borders, and with much fewer – if any – eligibility criteria attached.
DeFi is on the path to becoming the next big thing in the financial services space. And DeFi, backed by the innovative technology of blockchain, is poised to give banks and financial institutions a run for their money.
DeFi is like a bank, yet without a middleman or the need for a bank account. Nevertheless, it allows one access to practically all the facilities offered by a bank. You can lend, borrow, or amass savings, all without having to go through tons of processes and applications, and with significantly less time and effort.
DeFi is governed by smart contracts that are similar to real-life agreements on paper, only better. Smart contracts eradicate the need for middlemen and paperwork.
Moreover, since DeFi services are accessible from all over the world, and one does not usually need to meet any special eligibility standards, it is often dubbed as a permission-less system.
DeFi is already making waves in the financial business space, and recent numbers confirm it. According to the data from the DeFi pulse, the total value of assets locked in the DeFi space is worth US$2.74 billion, which is more than a 100% increase from last month.
The renewed interest in cryptocurrencies and blockchain technology has also helped in this DeFi boom. There has been an evident transition in people, from viewing cryptocurrencies as a get-rich-quick scheme to understanding the potential of this amazing technology.
With a targeted population that amounts to a quarter of a billion, DeFi can certainly redefine the whole financial sector for the better. Banks have always been reluctant for a transition from legacy technologies and processes to innovative technology, and this can be advantageous for a booming business like DeFi.
Like any other business in its early days, DeFi also has a few hindrances. But from a long-term perspective, these hindrances seem more like roadblocks that are bound to improve the product. And if the past is anything to go by, it won’t be long before DeFi becomes an active component in the average person’s financial activity.