How DeFi Enables Anyone to Participate in Financial Markets

The world bank accepts that more than 80% of the global population is underbanked or unbanked. The reasons vary from geographical limitations to qualification issues. One thing is certain, though, financial services are currently being offered to only a select few individuals.

Decentralized finance makes the equation more balanced by offering a globally ubiquitous alternative – a completely different way of how we interact with money.  

In today's article, we will see exactly how far DeFi can take you with financial inclusion and what it has to offer. Let's start:

The Challenges of Traditional Financial Systems

Traditional financial systems have historically served a select few sectors of population around the globe. Around 1.7 billion adults worldwide (that’s 80%), however, they are still unbanked - making it harder for them to save, borrow, or even make simple transactions.

It comes as no surprise that traditional banking systems have always been hard for many to access. The barriers are high, and they’re real.

Some of the most glaring challenges include;

Barriers to Entry

First off, we know how the financial system can make things complicated just to get started. To get into the financial system you need to open an account at a bank or brokerage which requires absurd fees or minimum balance requirements.  

Then, once you do get an account, credit scores often make or break you. It’s like a giant gatekeeping mechanism. In short, when you’re looking at this system, it just feels like it was never meant for everyone.

Limited Access

Barrier to entry aside, there’s the access problem. People in remote or rural areas have limited or no access to banks. We live in an age where tech has moved faster than ever, but banks haven’t caught up. In fact, for many folks, just having access to a checking account or credit card can feel like an impossible dream. And let’s not even get started on how those who are low-income or living paycheck to paycheck have to deal with overdraft fees or hidden charges that just make their lives harder.

Exclusivity

 
Last but not least, traditional finance systems tend to favor the wealthy or institutions.  

Big players dominate the financial world, which means that if you're not in the right circle, the system isn't really designed to work for you. This hurdle causes problems for most from achieving financial services.

Institutional investors have massive influence, and they can often move markets in ways that everyday investors can only dream of.  

It’s an imbalance that leaves most people on the outside looking in.

There needs to be a solution, a balance of sorts – and that is where decentralized finance comes in.

How DeFi Works: The Core Principles

So, defi is this magic potion which magically offers you all you all financial services without geographical barriers or any qualification requirements. It’s not all magic, though, but it might seem like it when you break it down.

Blockchain Technology

Decentralized finance is built on top of blockchain technology. No single person owns it. It is like a digital notebook which notes every transaction but not a single person or organization on that. Nobody can be tempered with that and everything is transparent, which is very unlike traditional banking systems.  

Irregular financial systems all your data is kept behind closed doors while blockchain keeps things transparent. Basically, the foundation of decentralized finance is a giant community ledger that doesn't need approval from any bank.

Smart Contracts

After the very base, comes your smart contracts. Smart contracts aren't like your lawyers; they are more of self-executing programs. These digital agreements automatically complete themselves once the conditions are met.

Decentralization

Now let's talk about the actual magic behind defi: decentralization. By decentralization I mean there is no central figure such as a government, corporation or bank running the show. Instead, the power is spread out among trusted community members who play a part in making sure that the things are running seamlessly. It is more like a community run project which allows everyone to participate.

Key DeFi Innovations That Empower Individuals

We have discussed the key elements of decentralized finance, Now, let's discuss how each and every innovation empowers individuals:

Real-World Examples of DeFi Enabling Participation

It’s not just all talk. Let me share some very popular examples of defi use cases that offered financial inclusion and empowerment.

Venezuela

Back in 2018, inflation peaked at its all-time high of 65,000%!! ...and according to IMF, minimum wagers dropped to just $5. This is when DeFi became more than just a buzzword for Venezuela. Venezuela turned to platforms like Paxful and LocalCryptos for its survival - and traded Ethereum and Bitcoin for essentials. These peer-to-peer platforms helped Venezuelan economy so much that in 2020, Venezuela was ranked third globally in defi crypto adoption.

Nigeria

This one takes us back to 2021 when the Nigerian government banned all crypto transaction through banks. The thing about youth is, they find a way around such situations and things weren't so different for Young Nigerians either. They immediately turned to wallets like MetaMask and TrustWallet and started trading with DEXs. This resulted in Nigerians trading over $400 million USD annually in P2P transactions while Naira had lost more than 50% of its value against the US dollar.

Afghanistan

We are all aware of the Taliban wars and bombings but what we aren’t aware of is the fact that Afghan families used Bitcoin and Binance Smart Chain tools to safeguard and move their money! Back in 2021, when Taliban took over, banking systems began to collapse which is when many Afghans, especially the women, lost access to their finances.  

In this time, the locals turned to decentralized finance and began using Bitcoins, Binance Smart Chains, and USDT tools to move their money. This became such a huge deal that The BBC followed the trend and published a report on it as well!

The Future of DeFi and Financial Markets

The future of decentralized finance looks bright with many innovations on the horizon. Here are some major trends and changes to keep an eye on:

Scalability with Layer 2 Solutions

In the coming years, we are hoping to leverage Layer 2 solutions to mitigate the problem of congested networks. This is because layer 2 solutions make it possible to have more transactions at lower costs so that DeFi can scale without sacrificing security or decentralization.  

Clarity on Regulations:

With the governments around the globe starting to realize the significance of decentralized finance, initiatives are already being taken. The Crypto Reserve initiative by Trump government is one such example. With these programs forming shape, governments are also attempting to establish clearer rules for defi.

Due to these improvements, we can expect to see more established guidelines on compliance in the near future. These rules will also allow DeFi to interlink more smoothly with the overall financial system but without diluting its decentralized foundations.

Technological Innovations:  

Quantum computing and AI have influenced pretty much every industry so it will not be wrong to estimate they’ll have a significant impact on the future of defi. On one hand, we can expect quantum computing to enhance blockchain performance and security. While, on the other hand, we can hope for AI to enhance automation and decision-making for dApps.

Final Words

By removing intermediaries, lowering costs, and opening access to everyone, defi is changing the face of finance as we know it. From Venezuela to Nigeria to Afghanistan, real-world stories prove that DeFi can offer hope where traditional systems fall short.  

And as technology evolves and regulations mature, the DeFi ecosystem will only become more powerful, more accessible, and more essential in shaping the future of global finance.