Defi: Banking The Unbanked

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30 Jul 2022

Defi: Banking The Unbanked

The centralized financial industry has witnessed an unprecedented rate of patronization for ages, and has been effective in keeping people's money safe. However, this effectiveness is often eroded by human-related risks such as mismanagement and corruption and an obvious lack of accessibility to everyone. The grand financial crisis and conspiracy that happened in 2008 exemplify two problems:

1. There are too many risks with centralized financial banks

2. There is a need for an assured, safe banking system that would be accessible to everyone regardless of background, race, color, and country.

Decentralized Finance (DeFI) has proven to be the solution to these two exemplified problems. So what is Defi? What does it stand for? How can it solve the problems enunciated above? But before diving into Defi completely, let's first look at the traditional banking system and why it can not be sustained.

The Traditional Banking System

Banking is not peculiar to the present dispensation, it has been around since the first currency was minted. Banks are the go-to for people or businesses who want to deposit payments, facilitate transactions, take loans, and perform any other financial dealings. In fact, as of 2019, the total market capitalization of only the top 10 banks in the world is valued at a staggering $2 trillion ~ this made a mockery of the entire cryptocurrency market value which is estimated to be worth $200 billion as at the close of 2019.

Despite this huge bank's market capitalization, the banking system is faced with a lot of concerns. Some of them are discussed below:

Lack of Accessibility To All

Perhaps the biggest downside of the banking system is that it is not accessible to everyone. The cumbersome process of getting a bank account, extreme poverty level and trust issues are making things difficult to incorporate many unbanked people into the banking system. The developing nations are the worst hit – they contribute more than half of the 1.7 billion unbanked people. In Nigeria alone, about 60% of the over 200 million population are unbanked.

Delayed Transaction System

If you've ever gone to the bank to send money for an immediate transaction, chances are that you might have gone back disappointed, as the transaction may go hours and sometimes days before it goes through. We aren't even talking about the high fees banks charge for every transaction. Though the invention of mobile apps for the banking systems has slightly reduced the time waiting for a transaction to go through, the problem has not been eradicated.

To add insult to the injury, if you are sending a large amount, you might be faced with the issue of documentation, compliance with money laundering, and privacy concerns. For example, assuming you are living in the US and you want to send $2000 to a friend in Germany. The process involved will usually delay the transaction, as there are exchange rate fees and inbound and outbound fees which can take days before your friend receives the transaction. One would wonder why I have to go through all these before making a transaction. It is that bad.

Monopolization of Authority

In the banking system, the central authority is with the management. Investors and depositors do not have equal authority with the management. The monopolization of power and funds in the banking system has resulted in many banks' databases being hacked by fraudsters. In 2016, about $100 million was stolen by hackers from the Bangladesh central bank. In fact, a report by cyber security firm Kaspersky Lab discovered that almost $1 billion in bank money has been stolen by a group of syndicate hackers in more than 30 countries. This is a worrisome trend that can not be made to continue.

Breeds Inequality

Those who enjoy the sweetness of centralized financial systems are the rich who have a huge financial war chest to access financial opportunities. However, this leaves the poor lagging behind in accessing opportunities. Most of them leave paycheck to paycheck, expecting when their next salary will be paid. The centralized banking system leaves the door of opportunities only to the rich while shutting the door to the poor who can not provide assets that can be used to build wealth.

DeFi As The Solution

At this point, the world needs an all-around solution that can successfully allay the concerns of the centralized banking system. Decentralized Finance is a solution that seeks to revolutionize the conventional financial ecosystem. Defi seeks to build a robust financial landscape to tackle the problems of centralized banking using the internet and blockchain technology. It is an open-source, transparent, and secure financial system that is built on top of the blockchain.

In its quest to encourage an open financial system, Defi encourages companies and organizations to build an actionable financial system on the blockchain. It seeks to hijack the monopolization power of centralized financial systems such as banks and give everybody equal opportunity on the platform. It is a grand shift from the centralized norm where banks act as intermediaries between two parties during transactions. With Defi, users will be able to access financial services without the need for a third party.

How Defi Solved The Problem

With decentralized finance, people can now heave a sigh of relief, the problems of centralized finance listed above are being solved

Defi Solution to Inaccessibility

According to Statista, 5 billion of the world population have access to the internet as of April 2022. The World Bank also estimates that two-thirds of the 1.7 billion unbanked have access to smartphones. Since Defi only requires a smartphone with internet access, Defi dApps can be a seamless way to integrate the unbanked into the banking world. With Defi providing an equal opportunity for everyone, more people will be able to unlock financial products which hitherto were lacking in the centralized banking system.

Defi Solution To Delayed Transaction

One of the core problems of centralized banks is the ever-increasing transaction time, but Defi has the potential to solve this problem. Blockchain as the technology that powers the Defi dApps usually finishes transactions in 15 seconds to 5 minutes. It also saves you from the banks who take a large share of your profits as the third party, as you only need to interact directly with your transaction partner without middlemen. You also get to pay less fee for the transaction.

Defi Solution To Monopolization of Authority

Primarily, Defi is an open source and transparent system, everyone knows what is happening on the network. Though there are governing councils, they are only there to oversee the affairs and make sure everything goes smoothly. If there are any potential loopholes, the nodes announce the development to every node on the network.
Defi transactions are written in lines of code called smart contracts which run exactly as they are programmed to, making it difficult to notice any potential flaws.

Wrapping Up

While Defi is still at its nascent stage and the opportunities embedded therein have not been fully unlocked. The heralded inventions and the move by different companies to have their stake established in the Defi ecosystem give credence to its potential.

The underpinning effect of Defi with massive recruitment and incorporation of many unbanked to the banking world underscores why it could be the messiah to take the financial industry to the promised land.

However, for the massive adoption of Defi by people, it has to first live up to its billing by solving perceived issues such as security, scalability, liquidity, and regulation if it wants to be the game changer in the financial landscape.