Decentralized Finance (DeFi): There are a variety of misconceptions about decentralized finance that have contributed to a widespread misunderstanding of what this technology really is. Many people wrongly accuse this burgeoning industry of being an opaque system of systems designed to make the rich richer while enticing retail investors to gamble their money away. However, this couldn’t be further from the truth.
The true promise of decentralized finance is its ability to make financial systems transparent and open source. At the same time, barriers to entry will be removed and many people who have been excluded from the current banking system will be empowered.
Over the past few weeks, the market has seen centralized financial institutions in the crypto space collapse due to their inability to successfully bridge decentralized financial instruments and a centralized financial model. Despite these failures, the truly decentralized world of finance looks as strong as ever. That doesn’t change the fact that these were disappointing results, leaving many people in a vulnerable position wondering when they will get their money back. But CeFi’s mistakes are not DeFi’s mistakes.
Decentralized finance and wealth barriers
Centralized corporations, even in crypto or other corporations in a perfect world, would invest, lend, stake, and collect income without having huge holes in their balance sheets that require mergers and acquisitions by larger corporations and liquidity providers to shut them down. Unfortunately, these institutions are not transparent about the way they run their businesses and clients must put their trust in the people running the business to safely manage their wealth.
This lack of clarity between institutions and their clients has been a problem since their inception, especially for the most vulnerable. We watched the episodes over and over again. In particular, the 2008 global financial crisis is a catastrophic series of failures that affected people worldwide. But every day, the most vulnerable face a multitude of obstacles that constantly prevent them from creating and maintaining wealth.
Decentralized finance and unbanked citizens
There is an amazingly large unbanked population in the world. According to a study by Global Findex approximately 1.7 billion people have no access to a bank anywhere in the world. High fees and minimum opening amounts are cited by unbanked people as reasons for not being able to open accounts and participate in the current system. These issues, coupled with distrust of the banking system, typically due to a lack of transparency around fees and deposit timing, also add to the problem. As a result, the unbanked and unbanked people have to use means like prepaid debit cards, money orders, check cashing or payday loans. These often have high fees, perpetuating a vicious cycle of economic inequality.
Cryptocurrencies and decentralized financial technologies offer these vulnerable populations a new way to access financial instruments without the traditionally high barriers to entry. Decentralized finance is powered by open-source algorithms, not humans, removing any kind of socio-economic barriers that stand in the way of underserved populations and traditional banks. Cryptocurrency and DeFi protocols can be a viable option for those facing racial discrimination and class bias from the banking system. Because everything is done online, anyone with internet access can open a cryptocurrency wallet, and access is available 24/7, making these tools hugely accessible to all people, regardless of socioeconomic status.
Cryptocurrencies and DeFi offer an alternative
Another tremendous benefit alongside this unprecedented level of transparency and accessibility is the ability for users to become directly involved in the management of these systems Decentralized Autonomous Organizationsalso known as DAOs.
Decentralized governance allows the people using the protocols to play an important role in all decision-making processes. Through community forums and on-chain voting mechanisms enabled by smart contractsNot only can users feel more confident in understanding the financial technology they are using, but they can also play a role in the decision-making processes that inevitably affect how they interact with the platform.
This innovation is unknown in traditional finance because it puts power directly in the hands of the people and takes it out of the hands of every corporate board that depends on benefiting from the people.
Breaking down the barriers between vulnerable populations and their access to wealth is an important step towards a better world. Empowering underserved communities is the most effective way to lift people out of the cycle of poverty in a truly sustainable way. Decentralized financial technologies are the tools people can use to break the systemic chains that have held them down for far too long.
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