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Bittime - The Economic Downturn of 2008–09 indeed shook up the deeply-rooted concepts of financial security that centralized finance once embraced. The repercussions of the crisis were felt worldwide as banks and corporations collapsed, stocks nosedived, and global trade dwindled.
Also Read What is Currency Crisis?
Bitcoin Emergence
In response to the Economic Downturn, Satoshi Nakamoto introduced Bitcoin in 2009, sparking a movement that led to the emergence of decentralized finance. Bitcoin (BTC) offered regular individuals access to a financial system based on decentralized consensus rather than centralized fiat.
Most Established Banking Could Still Fall
The crisis revealed the stark reality that even the most established banking systems in the world could falter under specific conditions. It underscored the vulnerabilities of a fragile, contemporary financial system that favored the financial elite, emphasizing the growing need to decentralize financial transactions.
Thus, cryptocurrency was born, with Bitcoin being among the first legitimate alternatives (outside of centralized finance) available to the public.
How does DeFi differ from conventional finance?
While traditional finance relies on centralized governance, decentralized finance, also known as "DeFi" enables people to access financial products through a decentralized blockchain network. With DeFi, intermediaries like banks or brokerage firms are unnecessary since individuals can engage in transactions through an immutable public record.
DeFi is based on the idea of democratizing finance by substituting central institutions (such as banks) with peer-to-peer relationships that bypass intermediaries. To comprehend how DeFi might revolutionize the world, envision this: Potentially, the financial services we currently use—like loans, savings, insurance, and more—could one day operate on a blockchain network rather than through banks.
At Present
DeFi allows individuals to conduct many transactions previously exclusive to banks, such as lending and borrowing, earning interest, purchasing insurance, trading assets and derivatives, and more. The primary distinction lies in the speed of transactions, which are much faster and do not necessitate a third party or the paperwork typical of traditional finance.
DeFi liberates the public's money, financial services, and financial products from the grip of traditional finance systems. It relies on secure distributed ledgers and is accessible to all—meaning you can utilize blockchain networks and decentralized finance platforms to make payments, borrow, invest, and even lend your funds, regardless of your identity or location. It primarily operates on Ethereum, allowing developers to continue creating a broad array of secure and efficient financial platforms.
Some of DeFi's key benefits compared to traditional finance include
- Secure digital wallets hold individuals' money instead of banks
- DeFi eliminates the hefty fees imposed by banks and other financial institutions for their services.
- DeFi is permissionless—anyone with internet access can use it without requiring approval from a central authority.
- Funds can be transferred within seconds
The Impact of DeFi is Profound
One need only observe how DeFi is supplanting banks for the underbanked population to gauge its influence. Currently, over two billion people worldwide are underbanked.
According to Statista.com, countries with less stable economies have higher proportions of the underbanked. In most cases, less developed financial systems also breed distrust among the general populace, further exacerbating the prevalence of the underbanked.
However, even first-world countries like the U.S. have an underbanked population, primarily due to insufficient funds. Financial services often entail high costs, from opening accounts to paying fees and charges (such as credit card memberships, withdrawal fees, bank checks, and the like). Consequently, it's understandable why individuals with low incomes might not find suitable options within traditional financial systems.
The DeFi Infrastructure Comprises
Blockchain technology: The foundation of DeFi, it's a digital ledger of transactions distributed across the entire network, making it nearly impossible to hack or alter the information.
Cryptocurrencies: Scarce tokens secured and transferred via cryptography. Bitcoin is an example.
Smart contracts: Vital to DeFi, smart contracts enable the creation of rules for any transaction type. This is where traditional agreement clauses can be transferred in DeFi.
Oracles: External data sources feeding crucial information into blockchains with smart contracts that need to be executed under specific conditions.
Stablecoins: A subset of crypto maintaining price parity with reference assets (gold, U.S dollar, euro, etc.), ensuring stability for investors.
DApps: Decentralized applications, Essential to DeFi, these are software apps operating on smart contract platforms.
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How can DeFi aid The Low-income Population?
So, how can DeFi assist the underbanked? By providing billions of people access to a system enabling them to manage their finances and conduct transactions securely.
At its core, financial freedom entails having access to financial services to manage one's finances. Under traditional finance systems, many individuals with lower incomes may not qualify for loans, investments, or even the opening of accounts in their names.
Banks Seldom Offer Financial Products And Services Catering To Low-Income Populations.
Traditional institutions typically impose strict requirements: high credit scores, steep fees, high incomes. Such barriers further impede those with low incomes from growing their wealth, perpetuating a cycle that disadvantages the underbanked at every turn.
Unlike traditional finance, which inherently favors the elite, decentralized finance promotes equal access to financial products in a secure environment. The social implications of decentralized finance are becoming evident, unfolding as cryptocurrency and mainstream finance intersect.
DeFi appears successful in mitigating inequality across the board through diversified financial services, transparent transactions, and accessibility via a permissionless network.
DeFi Renders Financial Services More Accessible and Democratized
Blockchain technology's very infrastructure enables secure transactions without central oversight. This is something traditional finance cannot offer because centralized finance's very structure necessitates guarantees (such as collateral for a loan) before providing services.
With Blockchain Technology
transactions are verified via a distributed public ledger accessible to everyone in the network, holding an immutable record of all transactions. The system is thus safeguarded from fraud and corruption without requiring a central party to oversee or act as a gatekeeper for the network.
DeFi Eliminate Entry Barriers
DeFi projects on blockchain networks eliminate the entry barriers typical of financial services offered by traditional banks. Through DeFi, the underbanked can access opportunities and products traditionally unavailable to them, such as loans and investments.
Microloans and Micro-Investments (Smaller Loans and Investments Offered By Individuals) Are Feasible
Because with DeFi, no monetary investment is required to provide a loan. The infrastructure disperses the risk among individual investors financing the loan, reducing the need for a single entity to shoulder the financing risk.
An underbanked entrepreneur in a developing country, for instance, can seek funding for their cryptocurrency project from global investors through a decentralized lending pool.
The opportunities with DeFi
Many promising investment opportunities exist in DeFi, but here are the most common:
Digital asset trading
Decentralized exchanges (DEXs) are peer-to-peer marketplaces where crypto traders can transact directly with each other, bypassing banks, brokers, or intermediaries. Numerous popular DEXs, including Sushiswap, Uniswap, and 0x, operate on Ethereum.
Lending protocols
Decentralized peer-to-peer lending platforms like Compound and Aave enable users to borrow funds with crypto assets as collateral. Users can also lend their crypto to others in exchange for interest rates higher than those in traditional finance.
Yield farming
Yield farming involves staking crypto assets. iin non-custodial DeFi protocols, allowing users to earn fixed or variable interest rates. This can be done using protocols like Vesper and Enzyme or by identifying protocols with high returns and transferring assets to that platform to earn high rewards.
Community and Finance Merging
Throughout this article, the primary question has been how DeFi can generate wealth to benefit communities, particularly the low-income. How can we ensure that financial elites do not merely co-opt blockchain technology for their benefit? Granted, as crypto becomes more mainstream, traditional financial institutions will also diversify their offerings, as evidenced by recent trends.
The convergence of these two "worlds" has been inevitable. However, the hope is that due to DeFi's very nature, the low-income population will have equal access to financial services, something traditional finance has failed to offer for centuries.
Investment opportunities once limited to the wealthy are now accessible to ordinary individuals thanks to DeFi. Major financial institutions have also shifted from condemning crypto to embracing it, albeit discreetly:
Jamie Dimon Calls Bitcoin "Fraud," Despite Clear Conflict of Interest
JPMorgan now offers clients access to six crypto funds … but only if they ask
While Continuously Being Refined
The technologies behind DeFi—blockchain and smart contracts—have created remarkable opportunities for people to take control of their money outside traditional finance.
For instance, some credit and mortgage platforms have begun using crypto as collateral. Instead of interest rates regulated by central authorities like governments, central banks, or federal reserves, they are market-regulated, meaning interest is paid in crypto and adjusted based on market demand.
Exponential technologies like artificial intelligence (AI) and the Internet of Things (IoT) are also being leveraged to develop regulatory projects addressing susceptibility to tax schemes and money laundering.
Through DeFi, People Can Invest In Large-Scale Global Projects
Financing significant real estate, infrastructure, technology, and climate change projects can now be done with tokens and smart contracts, leveling the investment playing field and making opportunities available to the general population, not just the elite.
Even companies listed on stock exchanges worldwide—like the London Stock Exchange, Tokyo Stock Exchange, New York Stock Exchange, and BOVESPA (the Brazilian stock exchange)—will start issuing tokens that are "shares in shares." These tokens can be acquired via DeFi, making the stock market significantly more accessible to investors from diverse backgrounds.
Large decentralized NFT marketplaces also allow users to exchange goods and services: Open Sea, BAYC, and Crypto Punks Larva Labs are prime examples.
Tools of DeFi: Smart contracts and DApps
Smart contracts
Smart contracts are contracts that operate on blockchains. They are triggered when specific conditions between the buyer and seller are met. These conditions, or terms of an agreement between both parties, are written directly into the contract's code.
Smart contracts can help the underbanked access financial services otherwise unavailable to them through traditional finance.
Smart contracts can be used for a loan agreement between two microfinancing participants.
A borrower ineligible for a loan from a traditional institution can leverage digital ledger technology to access funds directly from multiple investors, with a smart contract defining and monitoring the loan's terms.
Small business owners in low-income areas can also bypass the need for payment solutions provided by large banks and intermediaries. With smart contracts, peer-to-peer payments and transactions can be conducted quickly and securely.
Decentralized apps (DApps)
Smart contracts are also used to build decentralized apps or DApps. While similar to normal apps in function, the main difference with DApps is that they operate on a peer-to-peer network (like blockchain).
DeFi DApps, for example, facilitate financial services like lending and borrowing typically offered by centralized finance. They also facilitate peer-to-peer transactions and help the underbanked in low-income areas access financial services.
Kotani Pay, a project under the UNICEF Innovation Fund, allows Kenyans to convert crypto to fiat by dialing a shortcode (even without a smartphone). Another example is Leaf Wallet, designed to provide under-resourced communities and refugees access to digital financial services.
According to UNICEF, "Even without a personal banking history, institutional financial literacy, a passport, or a smartphone, Leaf helps people save, send, receive, exchange, and pay money directly to and from their phone."
How To Get Involved With DeFi?
If you're curious about the available opportunities through DeFi but don't know where to start, here are a few tips:
Get a crypto wallet
A crypto wallet is a digital repository where you can store your crypto coins for use in DeFi protocols. Choose any wallet, but ensure you keep your public and private keys, which allow you to regain access to your wallet.
Popular choices include MetaMask, Coinbase Wallet, and Argent. For example, MetaMask is an Ethereum wallet funded with Ethereum. It also includes access to an exchange for trading DeFi coins. With a wallet, you can access various DeFi protocols to participate in.
Purchase coins
The next step is to buy coins for the DeFi protocol you intend to use. Since most DeFi protocols are on Ethereum, it's better to buy ETH or ERC-20. You can also use Bitcoin, but you'll need to exchange it for an ETH version like Wrapped BTC.
Trade digital assets
Now that you're ready to start, you can lend out your crypto, invest it, or place it in a DEX.
Crypto Lending
You could lend out your cryptocurrency and become a "yield farmer," earning governance tokens awarded to those lending out their crypto.
Investing in DeFi projects is also an option, but only if you're open to risk. You can invest in projects like Yearn Finance or Aave. Alternatively, you can place your funds in a DEX (like Uniswap). DEXs allow you to earn fees as a market maker.
Full of Risks
However, remember that the crypto space is full of risks, as fraudsters and scammers still abound. Exercise caution when entering agreements, and conduct your due diligence when joining any pool or platform.
Consider stablecoins
If you're reluctant to deal with the price swings of underlying assets, consider TrueFi, a DeFi protocol for uncollateralized lending. It offers high returns on stablecoins, allowing participants to earn high yields on such loans.
The Future of DeFi
The rise of cryptocurrency and decentralized finance will likely continue to shape financial services in the near future. Even now, the effects of DeFi and crypto becoming more mainstream are widely felt, with more traditional institutions embracing decentralization—a potential boon for many, especially the underbanked. Diversified financial services made more accessible to the low-income population through DeFi are becoming a reality.
DeFi will likely pave the way for even more revolutionary opportunities for people, particularly the underbanked, to achieve financial freedom and independence. As such, security must continually be studied and enhanced, and scalability issues addressed.
Closing Thought
For the general public, staying informed about developments in the crypto industry is crucial, particularly for those looking to make informed investments. Keeping abreast of the latest market prices, news, and trends is easier through our website, where you can access a wealth of free resources, tips, and how-tos on everything crypto.
How To Buy Crypto From Bittime
You can buy and sell crypto assets in an easy and safe way via Bittime . Bittime is one of the best crypto applications in Indonesia which is officially registered with Bappebti.
To be able to buy crypto assets on Bittime, make sure you have registered and completed identity verification. Apart from that, also make sure that you have sufficient balance by depositing some funds into your wallet. For your information, the minimum purchase of assets on Bittime is IDR 10,000. After that, you can purchase crypto assets in the application.
Learn How to Buy Crypto on Bittime.
Monitor price chart movements of Bitcoin (BTC), Ethereum (ETH), Solana (SOL) and other cryptos to find out today's crypto market trends in real-time on Bittime.
Also Read
What is the Financial Crisis and its Relationship to Bitcoin
What is a Collateralized Debt Obligation (CDO)? Why is it starting to be abandoned?
DISCLAIMER: This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.
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