Originally published in My Crypto Advisor February 3, 2023
What services do you take for granted? Most likely, everyone reading this article has the ability to open a checking account or apply for a loan, but what about the “unbanked”? According to the World Bank’s Global Findex report, 1.4 billion adults were “unbanked” worldwide in 2021. The United States, a “developed country” accounted for 5% of the “unbanked” globally with over 13 million adults. The “unbanked” are categorized as individuals without an account with a regulated financial institution such as a bank or credit union. Reasons for being “unbanked” include distance to a financial institution, lack of identification, and money – all obstacles Decentralized Finance (DeFi) aspires to remediate in the next decade.
Decentralized Finance, also known as DeFi, provides globally accessible financial services 24/7 to anyone with a mobile phone and internet connection, enabling the farmer in a third world country access to the same financial services as the broker on Wall Street. DeFi refers to peer-to-peer (P2P) financial applications leveraging blockchain and other Distributed Ledger Technologies (DLTs) which form the backbone of Web3. DeFi applications automate traditional financial processes while enabling a more resilient financial system that does not rely on third parties and intermediaries. By using smart contracts, code that self-enforces and self-executes “Terms and Conditions”, a wide range of financial services from lending and borrowing to predictions markets, can be facilitated without human intervention.
The paradigm shift of DeFi and Web3 is self-custody. For millennia society has relied on third parties to hold custody of assets and facilitate financial transactions. As opposed to a bank holding your currency or brokerage buying your stocks, Web3 allows a user to self-custody their financial assets, through a software or hardware wallet, and connect to a DeFi application to facilitate a transaction. For example, lending applications such as Aave and Compound Finance, allow users to lock up digital assets into smart contracts in order to earn interest on deposits, all without an intermediary.
DeFi and Web3 unlocks the ability for participants to “become their own banks”, opening a world of opportunities for those previously restricted by financial, geographical, and identity barriers. In our modern world of interconnectivity, every citizen of this planet should be entitled to equal access of financial services. DLTs such as blockchain enable an automated and borderless ecosystem providing marginalized communities without financial services and legal identities the ability to participate in the global economy.
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