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DeFi for inclusion: how Decentralised Finance can reduce gaps in accessing financial services

Decentralised Finance represents an extremely interesting use case of blockchain, crypto assets, and decentralized autonomous organizations (DAO). DeFi is based on the idea to create a free and open financial space, without the restrictions or the entry barriers imposed by financial operators. As well as cryptocurrencies wanting to be decentralised currencies, DeFi wants to be the space where value can be built thanks to the use of cryptocurrencies. Thinking of DeFi according to the traditional categories of the financial world, and therefore seeing DeFi as a mere decentralisation of the modern financial system, cannot be considered representative of the current situation, and even less of the future one.

DeFi is a decentralised environment, not controlled by a single entity, where multiple initiatives and projects converge and receive funding from other participants interested in investing their cryptoassets. DeFi is run by protocols which exploit the connection and interoperability among different decentralised applications (Dapps) to generate new investment opportunities for the participants of the ecosystem. Interactions in DeFi occur through the use of smart contracts: users issue orders, which are received and executed by smart contracts, for the exchange and allocation of their cryptoassets.

Currently, the most common DeFi applications involve borrowing-lending protocols and Decentralized Exchanges (DEX) where users can exchange cryptoassets without the intermediation of a Centralised Exchange. However, on top of these solutions, many other applications are developing new models, which merge different sectors, from insurance to gaming.

Although DeFi is a small fraction of the total crypto trading volume, which reached $ 60 trillion in 2021, DeFi growth rate is simply impressive. In Q2 2021, DEXs saw the highest ever volume estimated at $343 billion USD. This surpassed Coinbase’s total trading volume of $335 billion in Q1 2021. Comparing data of the CeFi models with the DeFi ones, we can note as the development of DeFi projects is going much faster and needs just a ridiculous fraction of the workforce used to run CeFi companies.

If we see DeFi not as a mere speculation game but with a wider angle, we can capture the potential benefits from its deployment. Today the access to banking and financial services has rigid entry barriers, which consist, first of all, in the verification of the identity of the user requesting access, in the analysis of the financial history, or in other parameters that are imposed by regulatory requirements to decrease the transaction risk for intermediaries. This generates an impressive number of people, estimated at 1.7 billion adults called unbanked, not having access to any kind of financial service. And even a larger piece of the population can be defined as underbanked, meaning that they have access to a checking or savings account only.

On the contrary, in a blockchain environment, each user operates in a pseudo-anonymous way and the verification that a party has sufficient funds to execute the operation is carried out in a computational and decentralised way. In this context, the inclusive aspect of DeFi relies, on one side, on the possibility of accessing financial products without incurring management costs or entry barriers, and, on the other side, on the same level of access to information for each participant. Transparency is a value exploited by DeFi, where users experience the absence of information asymmetries, as any information useful for making an investment decision is freely accessible to anyone. Concerning this aspect, DeFi certainly represents a change of perspective compared to traditional financial markets, in which certain investment opportunities are reserved only for institutional investors, able to get privileged information, often not accessible to small retail investors.

Finally, a DeFi protocol is also a meeting place where economic actors operating in different business areas can startup venture initiatives through tokenomic systems and get funded by pools of investors. These new dynamics allow DeFi to be the evolution of ICOs (Initial Coin Offering) and IEOs (Initial Exchange Offering), frequently used to collect investments in the launch phase of blockchain projects, towards a new way to raise money in the market or to invest our wealth.

However, on the other hand, DeFi is a system still in its infancy, with multiple risks to be understood and addressed. Access to information comes with a significant level of accountability required to the user in entering any DeFi protocol. In fact, not being able to count on the support of the usual intermediaries, as well as on their assessments and risk protection systems, DeFi investors shall take on themselves the entire management of the investment, from the risk assessment, to the actual execution of the operation, and any cybersecurity issue. This requires a robust education on multiple matters, from tech to financial, that nowadays is spread just to a tiny part of the population.

We need to expect that DeFi protocols, which are currently mainly driven by short-term speculations, will evolve deeply. There are already evident trends that will be exploited by the economic actors who will be able to understand the potential. Making predictions on the future development of DeFi is difficult; however, it cannot be denied that a new way of financial participation is on the stage. It is up to us to drive this evolution towards concrete financial inclusion for a public benefit and not exploit these innovations to make our society even more divisive and more oligarchic.

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