Ethereum is a decentralised, open-source blockchain technology that features smart contracting. Decentralised Finance (DeFi) is an experimental use case of Ethereum that offers traditional financial services and instruments through this decentralised architecture.
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What you really need to know is that this decentralised approach to financial instruments eliminates the need for traditional brokerages, exchanges or even banks that are part of the current “centralised” financial system. This sounds pretty scary if you’re a brokerage, exchange or bank in the developed world but for many in Latin America, a region of the world where a significant proportion of the population have been underserved by financial institutions, the technology could be transformational.
The CEO of a Mexican cryptocurrency exchange observed, “We are seeing a significant growth in traction. People are even using DeFi protocols to earn interest on their accounts. The prices of cryptocurrencies are still volatile but we see a growing number of people looking to understand how they can use this technology in ways that were not available to them through traditional channels.”
“We are seeing a significant growth in traction. People are even using DeFi protocols to earn interest on their accounts.”
CEO, cryptocurrency exchange, Mexico
The CEO isn’t exaggerating: his exchange has 1.7 million users, mostly in Mexico, and is now expanding into Argentina with an eye on Brazil. By number of customers this would make his business the 7th largest bank in Mexico! It’s hardly surprising given that only 40% of Mexicans have a bank account and of that 40% the government has estimated that one third are dormant accounts.
In Colombia, for example, 83.3% of Colombians have a bank account but 30% are considered monetarily poor. A technical expert in the field explains, “We have a lot of people with bank accounts but no money.” Therefore other borrowing methods such as loan sharks thrive in Colombia and DeFi, with its peer-to-peer loans and derivatives, could help overcome these problems.
For now, the people who use DeFi are people who understand the technology and have enough money to accept the associated risks. People who use DeFi are people who don’t even need it, but have the interest and know-how. So this is one of the challenges, how do you bring the benefits of this service to the masses?
As the technology matures there are still barriers to widespread adoption, according to a technical expert in the field, “Regulation is one of the key risks we’re facing and it’s a moving target. At present there is a lot of copying and pasting from US regulations but there is still a lot to do.” Our source in Colombia adds, “Cryptoassets are not yet fully regulated, but they are not illegal, they are considered an intangible asset.”
“Regulation is one of the key risks we’re facing and it’s a moving target. At present there is a lot of copying and pasting from US regulations but there is still a lot to do.”
Technical expert, DeFi, Mexico
There are other risks too, including the volatility of cryptoassets, technical issues, and cybersecurity concerns, any of which could lead to the total loss of an investor’s funds. Despite this, the pioneers plough on and are growing in number. Large institutions entering the space include Tesla, MicroStrategy, Quare, PayPal and Mastercard, who have all announced that they will support cryptocurrencies as a means of payment.