Decentralized Finance in Developing Countries: Its Potential and Constraints

By ZOS Lending Network on Altcoin Academy

Decentralized finance also known as DeFi can be used to solve important problems in traditional finance. For example, in various developing countries the access to banking might be physically impossible whilst its asset review and trust mechanism slows down the process of loans and transactions even further.

So we don’t have to use cute “elephant” bank jars like this anymore :-P

But if DeFi could be installed efficiently, such constraints can be solved in a much shorter time frame whilst creating the room for new technologies to flourish in countries where banking options are limited. For the rural poor with little access to technology and communication, DeFi gives them an opportunity to improve their livelihood. Whether through entrepreneurship in farming, businesses or other ventures with DeFi available physical access to loans and deposits is not necessary.

Investments and banking methods in developing countries may also be in less developed stages as compared to developed countries i.e financial derivatives and sovereign bonds. But with the availability of DeFi it can give new choices of investments through BTC, ETH or stablecoins this can create new room for investors to store their money elsewhere from traditional banking whilst earnings from speculations of crypto can raise the consumption levels creating a larger middle class and leading more countries into the take-off stage in economic development or could be for future investments into businesses, etc.

As the cryptocurrency market is independent of the Central Bank and its monetary policies this means its value and its economic growth is independent of the economic situation of the country itself therefore it may give greater incentive to invest in crypto where the value and returns are greater than traditional banking (Hence why more people are turning to crypto in Venezuela/Argentina). Furthermore, remittance transfers can also be made cheaper by decreasing the service fees i.e from Western Union and its likely there are restrictions on capital flight (i.e China) but with DeFi such rules do not apply.

In both cases, DeFi and cryptocurrency can work in collaboration and compete with traditional finance and push each other to become competitive markets whereas, in the current situation, the financial market in developing countries are simply in inertia i.e junk bonds with credit rating of BB or less. (URL for map).

Countries by Standard & Poor’s Foreign Rating (March 2019)

Whilst with other uses for blockchain: aid and donation projects related to healthcare, government registry for population census, accountability of funds could be used in order to build from the knowledge of past projects whilst its decentralized ledger would allow transparency and prevent mismanagement of funds. Future projects could have greater effectiveness and coverage if such technology is used efficiently.

Least developed countries known as LDCs (please read: The Bottom Billion by Paul Collier) which have little to no infrastructure may be the easiest place for such systems to flourish as there is no existing foundation to build upon and there is no competing industry against it.

All of this technology if used efficiently can help leapfrog many developing countries into modern society without taking the number of steps which other developed countries have gone through i.e India hardly had any landlines but took off with smartphones.