Ethereum Q&A: When Will DeFi Reach the Unbanked?

[Question by David] “Defi’s goal has been to bank the unbanked. So far it has been mostly used by geeks. Whendo you think defi will penetrate the truly unbanked?” [Answer] I’m not sure if he truly unbanked want to be penetrated, David, [smiling] but we’ll take that question at face value. Alright, so if DeFi’s goal is to bank the unbanked, you know I think that maybe the stated goal, but more broadly it’s about making broader availability of financial services. And the way DeFi achieves that is by removing intermediaries and gatekeepers that traditionally have been barriers to economic inclusion. So this is how to think about it conceptually.

And the same thing applies both to DeFi as well as the broader 00:52 - space of cryptocurrencies, including of course Bitcoin, which is that one of the main reasons people are excluded from having access to financial services is because organizations that have complex complex relationships of counterparty risk with lots of intermediaries tend to be very risk-averse. And because a lot of that risk has to do with human decisions about how plugged in you are to the economic system, it’s a lot easier to just exclude large numbers of people based on relatively arbitrary criteria. This is the world we live in. Where billions of people have very limited access to financial services because it doesn’t serve the interests of the banks, the investment banks, the financial services organizations to include these people. And so the whole purpose of cryptocurrency is to extend financial services to those who don’t have it, by removing those who get in the way by demanding identity, credit, documentation, and all of these things that can be enormous in insurmountable barriers not just for people who live you know in deep in the Amazonian Basin or in sub-saharan Africa or places like that but also even in places like the United States. People who are not part of the mainstream. That includes for example, undocumented immigrants, includes the homeless you know try opening a bank account when you don’t have a permanent address and see how well that goes.

You 02:41 - know all of these are really difficult problems to solve and one of the easiest solutions is to simply not require any proof of identity and to extend financial services. This is aspirational. Now let’s talk about the reality. In reality, DeFi is not banking the unbanked at the moment except perhaps in a few very narrow cases with a few of the more simpler aspects of defi. For example, stable coins that are pegged to a national currency that is broadly recognized and used as a unit of account, like the US dollar, such as DAI from MakerDAO which is a decentralized stable coin and one of the foundational blocks of defi has some very interesting applications for the unbanked because it allows them to get into cryptocurrencies in a way that doesn’t expose them to wild volatility of markets vis-a-vie their national currency. So from that perspective it may make things a bit easier in the current environment where cryptocurrencies are still quite volatile because of their limited liquidity. So that’s an example where it might work but beyond that let’s be honest.

At the moment DeFi requires a lot of understanding, the technology is 04:12 - still immature and prone to problems, risks, and bugs, security bugs, and potential catastrophic security bugs, and user interfaces for using defi are not yet mature. And this is something that applies to all of crypto in general. So I think the difference between the vision and the reality may be as much as a decade of polishing and maturing the interfaces, broadening access, increasing liquidity, reducing volatility, maturing the underlying security of the smart contracts, and building more and more robust infrastructure so that it can be more broadly applied. That’s okay, that doesn’t mean the vision is unachievable. It simply means we have to be more patient with what is a very new and very radical departure from business as usual.

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