Updated: Apr 3
As with every nascent technology, Decentralized Finance (DeFi) is bound to encounter many teething problems. However, with the increasing adoption of cryptocurrency and blockchain technologies, is DeFi prepared to handle the demands of both emerging and troubled economies?
With global internet access slowly becoming a standard for more than half the world’s population, interacting with technologies that break away from societal norms, or even ones that aren’t offered, has never been easier. DeFi, a sector of the ever-growing blockchain industry, is looking as though it may be primed to establish a new status quo in the world of finance.
Backed by stablecoins such as Tether (USDT) and other cryptocurrencies such as Ethereum (ETH), DeFi platforms are offering up versatile solutions, services, and tools to establish a robust and complete financial ecosystem.
Bitcoin (BTC) is an example of DeFi at its most primitive, a digital asset with value that can be exchanged between individuals. Since the advent of Bitcoin, the roots of DeFi began to blossom, laying the foundations for what could become a true alternative to traditional finance. For economies lacking in infrastructure, this could be revolutionary.
Speaking with Aly Madhavji, a managing partner of the Blockchain Founders Fund, he noted:
“Nigeria is a particularly interesting market given that they have the most searches for the term ‘Bitcoin’ in the world. Organizations such as Coin4sales in Nigeria allow you to pay for mobile credit or utility bills with Bitcoin while Binance is creating a locally denominated stablecoin.”
However, he notes that DeFi is still in its early phase. According to him, there is a high demand for cryptocurrency lending products though these tend to attract wealthier individuals, though he notes that these products aren’t suitable for “broader use” due to their high-risk nature. However, in the case of Venezuela’s hyperinflation crisis, Bitcoin became a saving grace against the devaluation of the nation's fiat. Though according to him, such solutions don’t quite work out for everyone and unfortunately, “...don’t have the traction to replace high inflation national currencies...”.
Though contrary to this, speaking from the benches of the Kyber Network, one of DeFi’s darling protocols, the firms head of ecosystem growth, Deniz Omer, agrees, noting that though DeFi is an important tool for wealth preservation, is may not be ready for the mainstream just yet. Citing his first-hand experience of Cyprus’s 2013 crash, he recalls having financial control being taken away from him, watching his finances decline in value and even the confiscation of bank deposits, Omer sees DeFi as a great equalizer.
“Blockchain and DeFi are the radical new technologies that can provide a wide range of financial services that take the balance of power away from central bankers, and distribute it trustlessly and transparently across a permissionless network.”
Though it may not be prepared for the mainstream, it is evident that DeFi is going to be playing a role in our lives for many years to come, with both Madhavji and Omer anticipating a steady growth of adoption.
There are still a couple of key problems, amongst many, that need addressing before a decentralized economy can thrive. For one, platforms and services in DeFi are inherently linked to volatile assets that aren’t exactly cheap to transact domestically, and secondly, the technology just isn’t quite ‘there’ yet.
In developing markets where unbanked citizens can’t access financial services due to lack of ID’s or even banking solutions, even having an internet connection may fail to suffice.
“This poses the problem of completing KYC and AML requirements to be able to access on-ramps into any cryptocurrencies in the first place. Low fee, localized solutions for utilizing bank transfers to buy cryptocurrency and locally denominated stablecoins are critical pieces of the puzzle along with identity authentication.”
That said, there are platforms such as LocalBitcoins and Paxful where users without formal/government-issued identification can purchase cryptocurrencies directly from another person through a number of payment methods, including cash. Though access to such crypto-gateways isn’t widespread knowledge, which may change at some point soon.
If accessing crypto isn’t a problem, then Omer certainly believes that DeFi has a lot of maturing to do in order for mainstream adoption to be achieved. For Omer, the digital ecosystem of DeFi is complicated and doesn’t quite function as it could. But Omer is optimistic, noting that the entire Ethereum network is soon to launch ETH 2.0.
If the present Ethereum network has managed to achieve what it has done in its current state, then ETH 2.0 could be a silver bullet to the aforementioned problem areas. Looking ahead, Omer writes:
“... more mainstream adoption can be as close as half a decade away. There are also multiple competitors to Ethereum and this competition accelerates the growth in innovation even further and I believe brings mainstream adoption even closer.”
Ahead of the Curve
With respect to the current economic climate amid the Covid-19 pandemic, DeFi solutions, at least as a hedge against a potential global recession, could be cause for the tech to be further adopted.
As mentioned earlier, cryptocurrencies come in two flavours, volatile and stable. Those that retain their value i.e. stablecoins, are essential components to the DeFi ecosystem.
In short, stablecoins are cryptocurrencies that have their value verifiably backed by a basket of fiat and/or assets, thus guaranteeing their worth. These cryptos are especially prevalent with USDT sitting in the top ten cryptocurrencies by market cap at all times, highlighting the breadth of utilization either as a tool within DeFi or simply a hedge against market volatility.
In the case of a recession, one would assume that this would negatively impact the stability of such cryptos, in fact, Madhavji and Omer argue that this is not the case. Accordingly, the U.S. dollar would play a leading role in a global recession as nations and investors to respond in a manner where they require more dollars, which strengthens the dollar “relative to other fiat-backed currencies”, according to Madhavji.
Though the future is impossible to see, there are many individuals and entities in the world who are tapping this nascent technology for the betterment of civilization. If the technology and minds behind DeFi continue to paddle upstream, especially throughout this year, we could see the financial landscape change forever.
Whilst it may not be this year, or even next, DeFi’s big moment in the spotlight is seemingly overdue. With all the protocols and services available, the numerous updates and endless upgrades, it’s only a matter of time before DeFi is on the tip of the world's tongue, just as Bitcoin was in 2017 and has been ever since.