It’s not uncommon for decentralized finance (DeFi) proponents to bring up the topic of financial inclusion, that is, to provide access to financial products and services that are needed by individuals, businesses, and organizations.
At the most basic level for most people, this means the ability to make and receive payments and transactions. Building up from there, DeFi provided unrestricted means to create savings accounts, being able to access credit and insurance.
Blockchain-based cryptocurrencies worked at that basic level, allowing people without restrictions to send money to each other. DeFi networks, over the last two years, furthered the concepts of being able to save and get credit, even provide and buy insurance.
The means, but not the circumstance
Crypto and DeFi are certainly successes in their own right, with growing acceptance and mainstream use proving them as viable concepts. But the fact that roughly only 1% of the world’s population are crypto users —and far fewer for DeFi— suggests that the true milestone for crypto and DeFi, which is mass adoption, is going to be a struggle to achieve without solving their current challenges.
The World Bank’s definition of financial inclusion states that access should also be “useful and affordable” and delivered in a “responsible and sustainable way”. Given what we know are the issues surrounding the sector, this definition points to at least two painfully obvious hurdles in the DeFi.
The first is that using DeFi now is simply not affordable for the regular investor thanks to skyrocketing gas fees that make transactions worth less than several hundred dollars inefficient. The second is that there are so few mechanisms that ensure responsibility and sustainability in the way DeFi is delivered, as is proven by the numerous scams and hacks that occur on a daily basis in the space.
What would be the benefit of financial inclusion if you could access the means, but not the affordable, accountable, and sustainable circumstances that the financially excluded would require?
The path laid by fintech
The idea that a new architectural system for money and finance should finally bring access to the huge swathes of people all over the world previously unable to connect to financial products and services isn’t a new one. Fintech or “financial technology”, which preceded blockchain money, also rallied behind the same agenda of financial inclusion.
And where DeFi continues to face serious challenges in mass adoption —absolutely necessary for it to work —the battle-tested fintech sector has several success stories that can offer some clues as to what might help bring DeFi closer to its goal of financial inclusion.
If in the past, we were using traveler checks to spend money abroad and paying high commissions at money changers, we are now able to use fintech apps to send and spend money overseas, and buy things online regardless of currency quotes. Whereas our parents needed to fill out prospectus applications and public listing allocations, this generation can apply for challenger bank accounts in minutes, or load consumer apps with credit cards to invest in stocks and assets in a few screen taps from their mobile phone.
DeFi promises access to an even wider range of finance, especially in investment and hedging opportunities: staking crypto assets like Bitcoin and stablecoins, and financial services like lending and liquidity provision to open up even more profits.
So what would it take for more people to take up these opportunities? Here are some possible suggestions, based on the past success of fintech.
1. Don’t make DeFi about tech
You can’t really blame DeFi and blockchain projects for touting their technological advantages over legacy finance. Blockchain’s superiority in encryption, transparency, and peer-to-peer empowerment is unrivaled.
But consumers flocked to non-crypto personal finance apps because fintech companies excelled at cloaking the sophistication of the underlying technology. Their products and the marketing behind them focused less on the enabling tech, but on what the product enabled.
So don’t dangle your higher throughput or your Sybil-resistant blockchain in front of users. Instead, talk about what it does for people and how it can change or transform the way they meet their financial needs.
One of the most successful examples of fintech in this respect is Transferwise (now Wise), whose agenda was plain: money transfers that were instant, convenient, and transparent. That spoke right to the millions of users who found it highly inconvenient to transfer money abroad. Instead of days, it was now instant. Instead of needing to visit a physical counter, it was from an app. Instead of not knowing how much recipients would eventually get, they knew the exact amount that would be received.
Did the users care about Transferwise’s proprietary tech that maintained bank accounts in every single country with an algorithm that determined the positive balance for each national currency? Probably not!
2. User-friendliness is king
Another problem with crypto now is the high-technological barrier for newcomers. Most crypto wallets have come a long way from needing an encrypted password and private key access, but many still require users to understand how blockchain keys work in order to use them.
It generally becomes even more complicated with DeFi, with possibly multiple contract approvals and confirmations needed for a single transaction.
The most successful fintech apps took away the entire need for people to learn new technologies and focused on presenting the products in ways that were already familiar to consumers. In many cases, they made it even easier to use than traditional financial products.
In contrast, most DEX and AMM interfaces suffer from a seemingly crypto identity of minimalist yet unintuitive designs. Some don’t even have a walkthrough or help tooltips to get new users started. Part of why fintech apps have become so popular is that they’re almost no-brainers to use for most people who already know how to manipulate smartphones.
eToro is a prime example of how to turn a previously complicated process of stock trading became a simple process of tapping a buy or sell button to trade any listed stock. How did it start out? As an app that just asked users to predict if a stock’s price would go up or down.
3. Integrate regular money (fiat on/off ramps)
Buying crypto itself is probably still the most difficult hurdle for the newcomer. There are some projects that are looking into how to distribute crypto to people without the need to buy it, but for the majority of DeFi platforms and applications out there, you actually still need some form of crypto asset to start using it.
This means that there are additional steps to take before you can even start trying out DeFi — finding a place to buy crypto with fiat, and then sending that crypto to a wallet that can connect with a DeFi platform. For most people, even one additional step is one step too many, so how can we expect them to bear the inconvenience and costs just to set themselves up for using DeFi?
Whether you like it or not, people aren’t born with crypto in their possession. A fiat on/off ramp must be part of DeFi so that people can enter with their card or bank account without having to do so elsewhere.
Fintech apps discovered this as well. Robinhood, like eToro, was also a popular investment app but they truly exploded in growth when they came out with Robinhood Crypto. The key here wasn’t just user-friendliness (as in the previous section) but in the way they integrated fiat on- and off-ramps for buying crypto. Essentially, it was the first app for many people to buy crypto in an easy and aesthetically pleasing way with a debit/credit card.
Did users really care they weren’t really buying Bitcoin and didn’t have private keys that gave them ownership of Bitcoin? The 1 million users who signed up in four days for Robinhood Crypto early access didn’t.
Learning fintech lessons
There’s little question that DeFi will continue to innovate and improve the way people can use it. And while the suggested fixes still do not address the more complex issues of sustainability and accountability, there are clear paths to take if DeFi apps want to attract the people it claims to want to serve.
The reconstruction of financial products and services and providing decentralized alternatives to include the masses is still a worthy mission. To help make it a realistic one, DeFi might do well to take a page out of the fintech book of successes.
Ilia Maksimenka is the founder and CEO of PlasmaPay, PlasmaDLT and Plasma.Finance operating under the umbrella of Plasma Alliance. Together, this complete ecosystem of blockchain-based payments and DeFi protocols reflects Ilia’s long-held belief that decentralized finance will be the empowering catalyst for fairer financial systems that can equally benefit all.