DeFi has the potential to change the world, transforming the way people transact, bank, borrow, save, and invest.
In basic terms, DeFi relies on peer-to-peer networks to facilitate financial transactions involving cryptocurrencies, without any third-party intermediaries required. DeFi protocols leverage smart contracts, which are coded agreements that automatically execute when specific conditions are met, to automate transactions, enabling the creation of entire markets governed by their users, rather than a centralized entity.
Tokenization is a key element of DeFi. It refers to the way that physical and virtual assets, such as the U.S. dollar, gold, or stocks and shares, are transformed into digital tokens that live on the blockchain. The most famous token of all is Bitcoin, which acts as a store of value and a means of payment. Some tokens also confer part-ownership of DeFi platforms, bestowing their holders with “governance rights”, or the ability to vote on any proposals to change the way the platforms works.
It’s these unique characteristics that give DeFi the potential to transform the financial system, leading to a more ethical system where everyone can participate, with reduced inefficiencies, greater credit availability, and increased chances to build wealth.
DeFi means access to all
The inherent accessibility of DeFi makes it extremely powerful, as it can open up the world of finance to billions of people across the world who remain excluded from the traditional financial system.
The World Bank estimates there are 1.7 billion adults in the world who do not have a basic bank savings account. In the modern world, the lack of a bank account essentially guarantees that someone is unable to escape from poverty, as it condemns them to only dealing in cash, meaning no ability to save, access credit, or even obtain insurance.
When large segments of a population lack access to a bank account, it can significantly hinder that country’s economic growth prospects. It’s a serious issue in many developing nations, but they lack the basic infrastructure and social conditions to do anything to change this.
DeFi can solve these issues once and for all, as it dramatically lowers the barrier to entry for financial services. Anyone can access crypto and DeFi, even if they first have to pay for it with physical cash, simply by owning a smartphone. Crypto wallets are free to download, there’s no need to provide ID, and so as long as someone has a way to earn income, they can purchase crypto using a peer-to-peer service such as LocalCoinSwap, even meeting up in person to pay with cash if necessary. Once they have crypto in their wallet, the gates to the world of DeFi swing wide open.
There is no paperwork involved, no need to visit a physical bank, no need for a minimum investment, and there are no credit checks.
DeFi provides the means for the unbanked to securely save money, access lending and borrowing protocols, and engage in yield farming, allowing them to start earning interest on their capital, no matter how meager it might be.
It gets better than that, too. Consider a situation where a DeFi lending platform decides to collaborate with a community organization in an undeveloped country. They can partner to provide small loans to individual business owners and entrepreneurs, giving them access to much-needed credit that they’d never be able to obtain from a traditional bank.
Such a scenario occurred in 2018 through a collaboration between Block Commodities, a crypto-based commodities trading platform; Wala, a blockchain-powered financial services provider; Dala, creator of a zero-fee, gasless token for micropayments; and FinComEco, which is an initiative that helps farmers in Africa get access to international markets to sell their crops.
The collaboration saw the above organizations provide $10 million in loans to over 50,000 smallholder farmers across Africa, giving them opportunities to grow their businesses and improve their lives that simply didn’t exist before. Using the funds, the farmers could then invest in growing their businesses, with beneficial effects for their communities, stimulating economic activity and creating more jobs.
DeFi means opportunity for all
One of the most pertinent benefits of all is the way DeFi gives anyone a chance to grow their wealth. Through DeFi platforms, the masses can now access a range of sophisticated financial instruments, tools, and markets that, in the traditional financial world, have always been restructured to the wealthiest, most well-connected investors.
DeFi products such as derivatives, synthetic assets, automated trading strategies, structured products, and leveraged trading allow everyone to accumulate wealth that they would never be able to obtain by using traditional mechanisms.
For instance, derivatives are financial contracts that derive value from an underlying asset such as a commodity or a stock. Meanwhile, synthetic assets are digital representations of real-world assets, such as gold or real estate, that can be traded over peer-to-peer networks. Structured products combine a range of crypto assets, derivatives, and synthetics with sophisticated trading strategies, enabling investors to achieve very specific and targeted investment goals.
With the traditional financial system, access to these tools has been highly restructured. The capital requirements to use them, combined with the level of expertise necessary, meant that only the highest net-worth individuals could take advantage of them. With DeFi, financial trading is turned on its head, as anyone can access these protocols without going through an intermediary, and there are no minimum capital requirements.
Let’s consider the case of our African farmer, who earlier obtained a crypto loan and has grown his business sufficiently that he can now put away $50 a month in a savings account. With DeFi, he can do much more than put that cash away for a rainy day. For instance, he could deposit some of his funds into a decentralized exchange platform like GRVT, which has been designed specifically to cater to novice users.
With GRVT, the trading experience is as simple and as seamless as it gets. The app guides new users through all of the steps required to deposit funds and make a trade, and there’s a special “Simple Mode” that ensures the entire trading process is simple enough for anyone to do it.
As the user gains more experience from trading, they can begin to experiment with GRVT’s more advanced features, exploring various types of trades, such as margin trading, perpetual, and futures contracts. In addition, GRVT provides users with a curated library of trading strategies, enabling users to participate in more complex trades with far greater profit potential, providing real opportunities for our farmer to grow his wealth.
If our farmer doesn’t like the idea of trading and would rather invest in an asset he’s familiar with, he could instead go to a DeFi platform such as Synthetix, and gain exposure to synthetic assets like gold, silver, U.S. dollars or Euros. He can quickly buy and sell these assets without holding them physically and has the freedom to make long- or short-term investments.
Moreover, because Synthetix offers access to hundreds of different synthetic assets, our farmer can diversify his investments to better manage risk. The platform also offers a selection of automated investment strategies.
Another option for our farmer is yield farming, which involves lending crypto to borrowers to earn interest on the repayments, or else providing liquidity to DEX trading platforms. In DeFi, yield farming pays out interest that is far more lucrative than most traditional savings accounts can offer, and the risks are still very low when using an established platform.
For instance, one of the best-known yield farming platforms is Curve Finance, which is both a trading platform and a lending protocol. With Curve Finance, our farmer could deposit USDC or ETH into its liquidity pool, which provides the capital other users need to buy and sell crypto in a permissionless and decentralized way. Those who provide liquidity generate interest on their deposits by earning a fraction of the transaction fees applied to each trade. When doing this, our farmer will also receive what’s known as an LP token, which represents his share of the platform’s liquidity pool. He can then take these LP tokens and deposit them in another protocol, multiplying the interest he earns.
Curve Finance’s lending pools work in a similar way. Instead of being used for trading, lending pools provide the collateral for other users to borrow crypto from the platform, with our farmer’s interest coming from the loan repayments.
DeFi means everyone has a chance
The beauty of DeFi is that it offers unprecedented accessibility to these wealth-building tools, dramatically improving financial inclusion. While there are still no guarantees when it comes to DeFi investments, the difference is that people can at least take advantage of these opportunities, and attempt to build some wealth. With traditional finance, our farmer would have been shut out from the very beginning, but by making some smart decisions, he now has the opportunity to transform his life and find a way to financial freedom.
By offering access to financial tools to all, DeFi is helping to foster a more equitable and democratic financial landscape, creating new opportunities for the entire world to improve their lives.
Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.
