I stumbled upon an article by Jeff Desjardins which explains the 7 major flaws of the centralized financial system.
Reading it was good validation for the immense opportunity that lies in “DeFi” (i.e. Decentralized Finance). Yes, I know there is a lot of hype around DeFi, but underneath the hype also lies immense opportunities.
I’m sharing a summary of the 7 flaws with you, along with the DeFi opportunities I see here – definitely something worth thinking about:
1. Billions of people remain unbanked
Globally, about 1.7 billion adults don’t have any bank account. Why? Most people don’t have enough money to use one, and the other major reasons seem to come from the lack of financial education, high fees, and distance to a local bank.
The DeFi opportunity: Allow anyone with a mobile phone to download a crypto wallet for FREE. A crypto wallet provides people a gateway to the financial services offered by DeFi where they can EARN crypto.
2. Low global financial literacy
In fact, only 1 in 3 people understand the basic financial concepts such as interest, compound interest, and inflation. With such low financial literacy, making the right financial decisions is difficult.
The DeFi opportunity: Give everyone in the world access to financial markets. There are no rules about who can participate. By democratizing access to financial services, we also democratize access to financial knowledge.
3. High intermediary costs, slow transactions
Even for those who do have a bank account, they have to pay insane fees to send transactions and access various financial services. On average, most people pay 7.01% fees per transaction, and need to wait for multiple days to successfully make international bank transactions.
The DeFi opportunity: To create a trustworthy financial solution that is fast and low-cost.
4. Low trust in financial institutions and governments
With only 57% of citizens trusting financial institutions, financial services is the least trusted sector globally. Also, the trust in the government is at rock-bottom levels lately, which further affects how citizens view banking.
The DeFi opportunity: To create a financial solution independent of the central government and central banks.
5. Rising global inequality
The current financial system is dominated by people who already have access to financial opportunities, capital, and expertise. On the other hand, the vast majority of people don’t have access to any assets and opportunities that can create wealth.
The DeFi opportunity: Allow anyone with a mobile crypto wallet to have access to digital currency markets.
6. Financial censorship and currency manipulation
Currently, financial institutions and governments have the power to freeze accounts, remove funds from accounts and even deny the retrieval of funds to certain individuals. On a larger scale, countries have the power to manipulate and devalue fiat currencies, leading to hyperinflation. In Venezuela, for example, the price of a cup of coffee increased by over 2,289% in one year. Such hyperinflation, in turn, leads to loss of trust in the currency, vaporized savings, economic recessions, increased crimes, and massive political unrest.
The DeFi opportunity: To create a financial solution that is immune from censorship and centralized manipulation.
7. Build-up of systemic risk
The most important drawback of a centralized financial system is this: One abject failure can decimate an entire system. Basically, centralization is about putting all eggs in one basket – a problem that only decentralization can solve.
The DeFi opportunity: To create a financial solution that is, well, decentralized. By moving power from the center to the edges, we can build a system that is more resilient.