DeFi offers many benefits, including inclusiveness, transparency, and potential lower costs. While the world is ready for DeFi, there remain some serious drawbacks to its expansion.
Is the world ready for DeFi?
- Financial inclusion of the unbanked — A World Bank report from 2017 estimated that around 1.7 billion adults around the world remain unbanked. Nearly half of the unbanked adults come from the poorest 40% of households within their country. The unbanked are disproportionately young, uneducated, and more likely not to have stable employment. Many of these countries lack the infrastructure and capital to build financial banking systems utilized in developed countries. Not being able to have a bank account or credit severely harms economic growth. It stops individuals from taking business loans to start a company or school loans to go to college. DeFi and cryptocurrencies have the potential to give people digital identities, bank accounts, loans, insurance, and even the ability to build credit.
- The unbanked countries are already buying cryptocurrencies — Gemini’s 2022 Global state of crypto report shows that countries from Africa, Latin America, and Asia Pacific, which have large populations of unbanked also have the greatest percentage of their population that see cryptocurrencies as the future of money.
Fig. 1: Attitude on crypto from Gemini’s 2022 Global state of crypto report
Potential setbacks for adoption of DeFi
- Regulation — From 2019 to 2021, DeFi TVL grew 80x from $1 billion to over $80 billion in 2021. DeFi protocols that are used widely now include DEXs, lending/borrowing, derivatives, insurance, stablecoins, and asset management. Many of these dApps closely resemble products in the traditional financial marketplace, but without the compliance and investor protection, many institutions and retail investors won’t invest.
- DeFi Hacks — Due to errors or flaws in code, the number of DeFi-related cryptocurrency thefts has risen tremendously, growing from less than $250 million in 2020 to $2.3 billion in 2021.
Even with the risk of DeFi hacks and regulation, the adoption of DeFi continues unabated. Financial inclusion of the unbanked and the potential to participate in a decentralized financial system not controlled by central authorities continue to have appeal across the world. While DeFi across blockchains may face issues like scalability, we can expect DeFi to evolve as the world adoption continues.