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How will DeFi reduce economic inequality?

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It cannot be fate that the experts from fundamentally disparate economies acknowledge the revolutionary force that Decentralized Finance is, on the very same day. The economy today, and since forever has favored the wealthy to build their wealth and penalized the financially strained for being so. Decentralized Finance is set to restructure the economic disparity by facilitating access to wealth creation opportunities for the economically marginalized.

Traditional Finance: The propeller of economic inequality

Traditionally, financial instruments such as loans, leases, credit cards, and short and long-term credits have been accessible to the ones who have a history of “good credit score”, which is built through the existing generational wealth. Moreover, these tools are controlled by local government authorities, brokers, and banks who charge hefty prices making it further painful for the ones who do not have any fallback savings. Over time, these intermediaries have become major beneficiaries of the existing financial infrastructure. On the other hand, wealth creation tools like hedge funds such as stocks, and equity are beneficial only for those who have some “wealth” to invest.  TradFi, in essence, has failed to deliver equitable opportunity and financial security to a large section of society due to high entry barriers and the “wealth creates wealth” paradigm and has ended up amplifying economic inequality.

What does DeFi bring to the table?

Decentralized finance consists of financial applications like stablecoins, exchanges, margin trading, lending, borrowing, and much more, delivered without the involvement of intermediaries over the distributed “trustless” blockchain network. DeFi ensures the availability of openly accessible financial opportunities without discrimination on the basis of geographic location,  regulatory control, or socioeconomic status.

Built on secure blockchain technology, DeFi maintains transparency,  immutability, and non-repudiation of data while ensuring security, auditability, and pseudonymity.

DeFi demonstrates the potential to reshape the financial infrastructure through multi-faceted decentralization:

Procedural Decentralization

Blockchain technology enables the transfer of data and value among peers without the need of an intermediating party, thus reducing transaction costs and transfer delays in the system. Additionally, utilities like loans,  lending, and borrowing are carried out in a trustless and permissionless manner controlled through smart contracts.

Governance Decentralization

The protocols and transaction validation is performed via consensus mechanisms, employed for decision-making for all blockchain activities. The consensus is done through a random selection of authorized “nodes” or entities on the blockchain network who have the responsibility to maintain blockchain integrity and legitimacy.

Cost decentralization

As there is no central authority managing the execution of any kind of transactions across the system, the costs involved are reduced drastically. The costs involved are only for writing to the ledger, i.e. appending the transaction information across all the nodes on the network.  These involve costs for submitting, getting approvals, and adding the transaction to the blockchain. The earned benefits are distributed among the nodes validating the transactions. Thereby guaranteeing that the wealth remains distributed across the network.

Income Decentralization

Apart from the distribution of the transaction costs, DeFi offers multiple opportunities for users to stake, invest, and lend their assets in order to have passive income in terms of staking rewards, investment returns, and loan interests. Through the availability of peer-to-peer transactions made available by the underlying blockchain architecture, the previously unfathomable business models have found a way to thrive in the decentralized economy.

How can DeFi overcome the economic disparity? 

Decentralized finance has made available diverse platforms for users across the globe from different backgrounds to participate in the decentralized economy and enjoy opportunities otherwise available to the privileged few. DeFi passes over the intermediaries thereby making financial services more decentralized, innovative, interoperable, borderless, and transparent. Middlemen who were the primary functional unit of TradFi have to assume new roles in DeFi as with the democratization of the financial ecosystem they are only spectators while transactions are carried out in a  peer-to-peer manner. Thus providing direct flows between savers and spenders.

Additionally, by introducing staking rewards, transaction verification incentives and investment opportunities DeFi ensures that high liquidity is maintained in the system. This distributes the res[onsibilities of a governance authority, resource maintenance and allocation, and network health maintenance among the nodes themselves creating a self-governed universal system of entities who can independently make decisions for the network and their finances.

At present, (August 2022) 1% of the wealthy American population holds and controls more wealth than 92% of the population. This huge disparity calls for a mechanism to provide upward mobility for individuals. DeFi makes it possible by reducing the entry and geographic barriers through distributed ledger technology and introducing new financial instruments over Web 3.0.

What is still needed?

As promising as DeFi might seem there still exist certain roadblocks in the path.

Foremost being the vulnerability of these “cyber” systems to be attacked by technical geniuses and malicious entities on the network. Next in line is that the regulatory authorities are sparing no effort in trying to get a hold of DeFi service providers in order to regulate this aggressively dominating version of finance.

Experts from PrimaFelicitas are adept at cruising through complex regulatory adherences and employing the highest standards of security measures for each DeFi application developed to meet the business requirements of our clients.

Additionally, there is a requirement to educate those segments of the population about DeFi, who are left out of the mainstream system already. These masses remain unaware of the opportunities created by DeFi for them to leverage and break out of the economic crisis.

The Gist

With the enormous potential that DeFi has to disrupt the global financial architecture by introducing modern banking methodologies, remittances, securities, and investments, no stone is left unturned to regulate this space of financial freedom by the governance. Added to that is the lack of awareness among the marginalized masses while the better-off ones sprint to make the most of this space before it gets handcuffed once local-governance figures out a way to regulate it.

In effect, the point to ponder is how innovatively will DeFi applications be designed through integration with AI, IoT, or other emerging technologies to create a true “Web of  Free Value Exchange” while keeping its promises of security, anonymity, transparency, and provenance.

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