How can DeFi drive Financial Inclusion?
Decentralized finance aims to deliver traditional financial instruments without interference from intermediaries or controlling authorities. It leverages blockchain technology which entails reduced costs and lowered entry barriers. This results in opening doors for the financially marginalized to participate in the new-age economy
As per World Bank, 1.4 billion adults are unbanked based on a Global Findex study in the third quarter of the year 2021. This is about 21% of the global adult population! The top reasons are accessibility, high entry barriers, and lack of awareness. Accessibility in terms of only a few available financial institutions, and high costs of financial services. Illiteracy about the benefits of leveraging financial instruments and financial understanding to utilize them. Finally, complex terms and conditions and a lack of enough money to participate or enter the system. DeFi on the other hand enables the users to transfer, save, trade, and even earn digital assets such as cryptocurrencies, and NFTs by using e-wallets, and decentralized exchanges.
Decentralized Finance is based on the Internet and the instruments are accessible through mobile applications and web applications as well thus removing geographic barriers and making the global decentralized economy accessible. The foundation of the DeFi – blockchain network emphasizes on decentralization of governance and allows individuals to exercise complete control over their assets. This removal of any controlling authority and intermediaries reduces costs of operation while liberating the users of the tedious process of approvals. Via liquidity pools, DeFi markets enjoy a bigger outreach for lending and borrowing services with exchange rates much better in comparison to the traditional or centralized financial services.
DeFi is based on transparent operation principles as both the technology and the protocols are open-source. All transactions are written to the immutable ledger. This accredits independent audits, security checks, and transaction verifications thus facilitating regulatory compliance. Compliance is enforced to ensure the health of the financial system through smart contracts again reducing administrative costs. The only cost that individuals have to bear is that of the transactions they do and nothing else. This in addition lowers the barriers to participation for individuals belonging to lower income groups.
Adding to the above-mentioned perks, DeFi offers a generous amount of wealth generation opportunities further to reduce the rich and poor disparity in the economy. DeFi has not only made way for individuals but also facilitates financial institutions and governments to redefine economic distribution. Through the globally pronounced economic downturn, only DeFi has shown positive signs and is valued at close to $300 billion at the time of writing this article (July 2022) and is expected to continue on its upward trajectory and pull along the traditional economy as well while leading to mass inclusion through its accessible nature. Though an emerging industry still in its infancy, DeFi has the potential to globally boost business growth and aid users in building wealth.
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