Why DeFi can drive financial inclusion in developing countries
Cryptocurrency has myriad potential benefits for users, savers, and investors across the globe. Within developing markets, however, it is frequently argued that blockchain technology and the transparent, digital currency that runs on it has the potential to transform economies beset by unstable national currencies and rampant hyperinflation.
Countries often cited as an ideal use case for crypto include Zimbabwe, which has been plagued by hyperinflation since 2007 (inflation grew 622% in 2020 alone), as well as politically volatile Venezuela, whose bolivar has famously been used as the raw material for handbags worth 10,000 times more as tourist souvenirs than the combined value of the bills themselves.
For regions such as these, cryptocurrency offers a way to bypass turbulent national currencies to pay for goods and services otherwise inaccessible. Indeed, in many developing countries the uptake of crypto is being driven by solo retailers using smartphones to process payments, as well as larger businesses. More than 20,000 retailers now accept cryptocurrency in Venezuela, for example, including US fast-food giants Pizza Hut and Burger King.
Crypto payments only the first step
As heartening as this adoption is, however, it barely scratches the surface in terms of cryptocurrency’s potential application throughout developing countries. While paying for otherwise hard-to-get goods is a crucial first step for cryptocurrency in some developing nations, helping those faced with rapidly depreciating currencies to save and invest for their futures is the urgent next move.
According to a 2017 report from The World Bank, around one-third of adults, or over 1.7 billion people, do not have access to an account with a bank or mobile money provider, with “virtually all” located in developing countries. China and India have the largest share of this statistic, with China home to 225 million adults without an account, and India 190 million. This is followed by Pakistan, Indonesia, Nigeria, Mexico and Bangladesh.
The implications of this are many: from being unable to secure steady, legal employment and safe housing, to taking advantage of valuable online services, to saving money in a safe, profitable way. The latter is crucial to building financial security and stability and is, arguably, where cryptocurrency can really take a lead in developing economies. Or, more specifically, where decentralized finance (DeFi) can take a lead.
DeFi brings banking to everyone
DeFi is the next stage of cryptocurrency’s evolution that is seeing banking begin on the blockchain. Numerous platforms, protocols and exchanges now allow people to save in non-volatile stablecoins pegged to globalized fiat currencies such as the US dollar and Euro. This is a unique opportunity for many in developing countries with rapidly devaluing national currencies to begin to build savings in stable currencies that can provide for their present and future needs.
The scope for wealth creation in DeFi is vast, with barriers to entry low: almost anyone with access to an internet browser is able to start using DeFi protocols and earn up to 20% APY on fiat-backed assets. Access to these types of opportunities is potentially transformative, while the technology that underpins DeFi has the potential to bridge some of the most pressing financial challenges faced by billions of people in underdeveloped countries.
One Nigeria-based DeFi protocol, Xend Finance, has used DeFi to solve issues of accessibility around both savings and credit. Users of the Xend Finance platform can save and invest in stable currencies and even set up their own credit unions and cooperatives that provide stable lines of credit to borrowers, and returns of around 15% to lenders.
Meanwhile in Asia, Thailand-based OMG platform is working to build financial inclusion through an interoperable Ethereum layer 2 protocol that can connect traditional banking services with the blockchain to directly serve those that lack access to banking.
Working to realize endless potential
Of course, there remains some way to go in terms of opening DeFi to developing markets. A recent report from The Defiant showed that developing nations accounted for just 10% of traffic on the biggest DeFi dapps’ in February, with Uniswap — DeFi’s biggest exchange — attracting virtually no visitors from emerging markets over the period. Potential challenges include a lack of awareness of DeFi, security concerns, as well as issues around accessibility and connectivity.
Projects like Xend, OMG and YIELD App — which offers up to 20% APY on stablecoins and ETH globally — are doing important work in addressing some of these problems and opening DeFi to developing countries, particularly through education. As DeFi evolves, it will offer more and more to users in these regions, including payment cards linked to cryptocurrency accounts and loans that can potentially be used for housing and other “real world” services.
The services and opportunities that DeFi can provide could truly change the lives of millions of people in the developing world. From the ability to save and invest in stable currencies, borrow to build or improve housing or pay for children’s education to generating personal wealth and a retirement fund. For many in developing countries, these things are simply not an option in the current system, but they can and will be within DeFi.
