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App\Entity\Article {#1094
  -id: 8556
  -title: "Unbanking the Future with DeFi"
  -slug: "unbanking-the-future-with-defi"
  -introtext: "<p><span style="color: #000000;"><a href="technology/the-defi-opportunity">Decentralized finance</a> is threatening to undermine the very role and function of banks, but can the technology live up to the hype?</span></p>\r\n"
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    <p id="00f2" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq ix" data-selectable-paragraph><span style="color: #000000;"><span class="s iy iz ja jb jc jd je jf jg hr">T</span>rekking the twenty miles from her little coffee stand in La Paz, to her family homestead in the foot hills of the Andes isn’t physically challenging for 40-year-old Maria Flores, it’s financially daunting.</span></p>\r\n
    <p id="f5fe" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">Having taken out a microloan from a United Nations-backed non-governmental organization, Flores has improved the lot of her family, selling piping hot mugs of thick, freshly-brewed coffee in the outskirts of Bolivia’s capital. The only problem? Travelling around with all that cash.</span></p>\r\n
    <p id="360d" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">Flores loves the independence of her work and the ability to make her own money, but it’s also a constant source of worry for her as well.</span></p>\r\n
    <p id="a292" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">Whether it’s paying protection money to the street gangs that roam the city, or being robbed on the journey from her home to her coffee stand, Flores is constantly at risk of losing what little cash she generates from her business.</span></p>\r\n
    <p id="59fb" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">One of billions of people around the world who are unbanked, Flores uses an informal network of “money keepers” who typically operate at mobile phone stores which sell prepaid airtime credits, and who convert that money into credits on her phone, which she can then sell back to the shop, when she needs the cash for other purposes.</span></p>\r\n
    <p id="d797" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">An extremely inefficient system, this “shadow banking” regime adds a drag of up to 11% on the income of Flores, money she could otherwise have been saving to expand her business or educate her children.</span></p>\r\n
    <p id="b735" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">Across much of the <a href="https://blogs.worldbank.org/opendata/should-we-continue-use-term-developing-world" target="_blank" rel="noopener">developing world,</a> a shortage of banking services has seen millions stuck within a poverty cycle — never developing the credit history that they need to take loans to better their lot, and never having access to a bank account that would provide them with the security to deposit their money and generate interest.</span></p>\r\n
    <p id="f087" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">Yet a revolution in the developed world is suggesting that rather than spread banking to the rest of the world, banking should actually be reduced.</span></p>\r\n
    <p><span style="color: #000000;">Decentralized finance is a rapidly emerging industry of cryptocurrencies, where DeFi platforms such as&nbsp;<a href="https://deficoins.io/" target="_blank" rel="noopener">defi coin</a> allow people to lend or borrow funds from others, speculate on price movements on a range of assets using derivatives, trade cryptocurrencies, insure against risks, and earn interest in savings-like accounts.</span></p>\r\n
    <h2 id="2dbd" class="jh ji dt ce jj jk jl eu jm jn jo ex jp ey jq fa jr fb js fd jt fe ju fg jv jw eq" data-selectable-paragraph><span style="color: #10228b;">Big on Banks</span></h2>\r\n
    <p><img src="/images/articles/global-economy/Bitcoin_Doesnt_Fix_DeFi-_Its_DeFi_That_Fixes_Bitcoin-min.jpg" alt="Bitcoin Doesnt Fix DeFi Its DeFi That Fixes Bitcoin min" width="600" height="400" /></p>\r\n
    <p id="2324" class="ib ic dt id b es jx if ig ev jy ii ij ik jz im in io ka iq ir is kb iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">For the most part, there is a sound business reason why the poor generally don’t have access to banking services — it simply costs too much to service small accounts.</span></p>\r\n
    <p id="5f90" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">But what that does is perpetuate a poverty cycle that the banks have no commercial interest to break.</span></p>\r\n
    <p id="2a46" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">Yet fly into any major commercial capital across the rich world and the skyline is typically peppered with some of the biggest names in banking, imposing monuments to capitalism.</span></p>\r\n
    <p id="d493" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">But it’s not just the imposing physical presence of banks in most major cities, they also dominate our economic lives — from mundane transactions such as buying groceries, to receiving pay checks and paying rent — nothing of note commercially is complete without a nod from the banks.</span></p>\r\n
    <p id="9fa3" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">For almost as long as there has been money (whether that money be Rai stones or cotton dollars) there have been institutions providing safe storage and a ledger of ins and outs for it.</span></p>\r\n
    <p id="3583" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">And as long as there have been deposit-takers, there have been managers who have noticed that not all depositors will require all their monies nor at the same time.</span></p>\r\n
    <p id="a691" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">Which means that these deposit-takers didn’t always need to hold on to all of their deposits, they could lend out some of that for interest and indeed, during the time of the Italian Renaissance, moneylending was the primary activity of the Jews.</span></p>\r\n
    <p id="3308" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">Because while there were religious laws against usury (lending with interest) between Jews, there weren’t any laws that prevented Jews from lending to Christians.</span></p>\r\n
    <p id="9575" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">And lend they did.</span></p>\r\n
    <p id="98c2" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">Over time the Shylocks of the Renaissance evolved into the modern institutions we know of as banks today, funding commerce, but also fueling crashes.</span></p>\r\n
    <p id="be5b" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">The “fractional reserve” policy that banks hold against their deposits make them inherently unstable institutions, contributing to capitalism’s history of economic enrichment, interrupted regularly with bank runs and financial crises.</span></p>\r\n
    <h2 id="5616" class="jh ji dt ce jj jk jl eu jm jn jo ex jp ey jq fa jr fb js fd jt fe ju fg jv jw eq" data-selectable-paragraph><span style="color: #10228b;">A Pound of Flesh</span></h2>\r\n
    <p id="52e1" class="ib ic dt id b es jx if ig ev jy ii ij ik jz im in io ka iq ir is kb iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">Today, banks are larger than at any time in their history, with the world’s top 1,000 banks worth a combined US$128 trillion last year, more than the annual global gross product.</span></p>\r\n
    <p id="768f" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">In financial terms, banks aren’t bigger than the world, they&nbsp;<em class="kf">are</em>&nbsp;the world.</span></p>\r\n
    <p id="e6b8" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">But technology is increasingly threatening banks’ seemingly unassailable perch atop the global economic pecking order.</span></p>\r\n
    <p id="cbdc" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">Central bankers have watched slack-jawed as tech giants have developed quicker and easier digital payment systems that have the power to suck transactions out of the banking system faster than a teenager inhales pancakes at breakfast.</span></p>\r\n
    <p id="b0fa" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;"><a href="financial/digital-payments-distribution" target="_blank">Digital payments</a> may usher in the demise of cash, and cryptocurrencies have developed to circumvent financial regulation and one day may undermine monetary policy.</span></p>\r\n
    <p id="0b62" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">To meet that challenge, some 80% of central banks are either working on or mulling their own digital currency, according to the Bank of International Settlements.</span></p>\r\n
    <p id="49b2" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">But while some may observe that the banking industry is simply facing what other industries such as the media and retail have had to face — digital disruption — banking isn’t the same as catching a ride in someone’s car or paying to sleep on a stranger’s couch.</span></p>\r\n
    <p id="53f5" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">At its core, banking represents the interface of the state and the economy.</span></p>\r\n
    <p id="174e" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">But is that interface even relevant anymore to modern economic life?</span></p>\r\n
    <p id="4810" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">Decentralized finance suggests that it may still be relevant, but only up to a point.</span></p>\r\n
    <h2 id="c14e" class="jh ji dt ce jj jk jl eu jm jn jo ex jp ey jq fa jr fb js fd jt fe ju fg jv jw eq" data-selectable-paragraph><span style="color: #10228b;">RedFining Finance</span></h2>\r\n
    <p id="9470" class="ib ic dt id b es jx if ig ev jy ii ij ik jz im in io ka iq ir is kb iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">Generally referring to open, permissionless and highly interoperable protocol stacks built atop public smart contract platforms such as Ethereum, decentralized finance or DeFi, represents the promise of financial services without intermediaries and centralized institutions.</span></p>\r\n
    <p id="94e1" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">Based on open protocols and decentralized applications, agreements are enforced by code, transactions are executed in a secure and verifiable way, and legitimate state changes (ledger entries) are made immutable on a publicly searchable and verifiable blockchain.</span></p>\r\n
    <p id="297a" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">DeFi creates an environment that can simultaneously provide unprecedented transparency and equal access rights, while still preserving privacy and reducing transaction friction.</span></p>\r\n
    <p id="a5c3" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">With a wide variety of applications, DeFi can enable one to buy dollar-pegged assets using stablecoins on decentralized exchanges, move these assets to an equally decentralized lending platform to generate interest, then add the interest-bearing instruments to a liquidity pool or on-chain investment fund.</span></p>\r\n
    <p id="996b" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">And all of that can be achieved (and more) without so much as even stepping onto the highly polished marble floor or your downtown bank.</span></p>\r\n
    <p id="83ef" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">Today, some 90% of the broad money supply is in bank deposits, held up by small reserves with the central bank and an implicit central-bank guarantee.</span></p>\r\n
    <p id="c0a7" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">That arrangement makes it possible for central banks to instill confidence in the financial system, whilst still maintaining the semblance of independence from the provision of credit.</span></p>\r\n
    <p id="6a5f" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">As central banks consider the threat posed by uncontrollable cryptocurrencies, usurping the role of fiat currency and challenging the sizeable value that governments derive from seigniorage, many will eventually decide to issue their own digital currencies.</span></p>\r\n
    <p id="22c4" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">But digital currencies come with substantial political and social baggage.</span></p>\r\n
    <h2 id="2e46" class="jh ji dt ce jj jk jl eu jm jn jo ex jp ey jq fa jr fb js fd jt fe ju fg jv jw eq" data-selectable-paragraph><span style="color: #10228b;">Damned by Digital Dollars</span></h2>\r\n
    <p><img src="/images/articles/global-economy/7_Common_Digital_Marketing_Myths_Busted.jpg" alt="7 Common Digital Marketing Myths Busted" width="600" height="338" /></p>\r\n
    <p id="f10b" class="ib ic dt id b es jx if ig ev jy ii ij ik jz im in io ka iq ir is kb iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">Beyond the usual concern that a central bank-issued digital currency could be tracked, it also creates a direct relationship between a central bank and its citizenry where none previously existed.</span></p>\r\n
    <p id="688e" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">And that relationship is fraught from the very beginning, with a state-issued digital currency concentrating power to determine economic life in the hands of a central bank, giving a handful of individuals an enormous amount of power and a wealth of information about a country’s citizens.</span></p>\r\n
    <p id="cbea" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">A <a href="financial/what-is-a-central-bank-digital-currency" target="_blank" rel="noopener">central bank digital currency </a>is also programmable money — who’s to say that a political regime can’t decide that that money can’t be used to buy foreign publications or for making donations to specific political causes that are contrary to the power of the day?</span></p>\r\n
    <p id="fba7" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">Cash is not traceable, but digital money, even cryptocurrencies, leave a trail.</span></p>\r\n
    <p id="f43b" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">To that end, DeFi has the potential to create a truly open, transparent and immutable financial system, accessible to all and controlled by none.</span></p>\r\n
    <p id="b61e" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">But DeFi isn’t just mimicking the legacy financial system, it’s opening up entirely new financial instruments that could not have been realized without the existence of public blockchains.</span></p>\r\n
    <p id="4244" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">From atomic swaps to autonomous liquidity pools, flash loans to automatic market makers, DeFi is adding to the universe of financial products.</span></p>\r\n
    <p id="a8ef" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">But DeFi is by no means a utopian solution.</span></p>\r\n
    <p id="d5f1" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">Smart contracts may have unknown and unknowable security issues that allow for unintended usage.</span></p>\r\n
    <p id="58a5" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">And high gas (transaction) fees and issues with scalability continue to dog broader expansion, leading to the rise of competing blockchains.</span></p>\r\n
    <p id="a1b9" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">Many protocols also rely on external data sources for validation, which undermines the removal of the trusted third party from the financial ecosystem.</span></p>\r\n
    <p id="594d" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">DeFi is giving bankers, central or otherwise, food for thought and forcing digital innovation and disruption on an industry that has remained more or less unchanged since the 15th century.</span></p>\r\n
    <p id="a768" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">Since the founding of the Medici Bank in Florence during <a href="https://www.history.com/topics/renaissance/renaissance" target="_blank" rel="noopener">the Renaissance</a>, little has changed for banking, and for as long as the centralized ledger was the cornerstone of banking, little change was required.</span></p>\r\n
    <p id="cc10" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">That ledger, which formed the basis of what was owed to whom and to whom was owed how much, eventually evolved to what we know today as the modern banking industry.</span></p>\r\n
    <p id="f06b" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">The advent of the decentralized immutable ledger has the potential to change that.</span></p>\r\n
    <p id="d84e" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">DeFi may lead to a <a href="financial/bitcoin-doesn-t-fix-defi-it-s-defi-that-fixes-bitcoin" target="_blank">paradigm shift in the financial industry </a>and whilst that shift may not come overnight, at the very least, it forces the consideration of a move to a more robust, open and transparent financial infrastructure.</span></p>\r\n
    <p id="e294" class="ib ic dt id b es ie if ig ev ih ii ij ik il im in io ip iq ir is it iu iv iw dl eq" data-selectable-paragraph><span style="color: #000000;">And you can bank on that.</span></p>
    """
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  -metakey: "Unbanking the Future with DeFi"
  -metadesc: "Decentralized finance is threatening to undermine the very role and function of banks, but can the technology live up to the hype?"
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