Background/Industry

Decentralized Finance promises to provide a variety of financial instruments without the need for middle(wo)men to ensure that the services are trusted. According to the OECD, financial services typically make up 20–30% of total service market revenue and about 20% of the total gross domestic product in developed economies1. This is an enormous industry dedicated to one thing: making sure that financial transactions are trusted. With the advent of blockchain, trustless systems and smart contracts can be used to replace much of the functionality of this industry, dramatically increasing the return on investment for the individual investor. Financial services today are providing an important service, but at a very high cost, and despite many fintech developments, the following underlying issues persist:

High transaction costs. Due to regulatory requirements, legacy systems with complex interoperability issues, and control by large institutions, transaction fees are high for the average user of banking and financial services. Services that require a broker are even more expensive, as agents and other types of middlemen are involved. Slow transactions, particularly for international transactions. Although theoretically, it should only take minutes for computers to transact, moving money from one institution to another can take hours within a country, and it can take days between countries. Lack of transparency and unfair advantages to large players Financial instruments are complex and most people do not have access to the information that would allow them to make optimal decisions. Lack of transparency is one of the major factors that led to the 2008 financial crisis and in the short term, it always leaves smaller investors (the average person) at a disadvantage compared to institutional investors. Inaccessibility and/or higher cost to lower-income people Financial services are simply not available in many geographies, and when they are, lower-income people are hit with even higher fees (percentage-wise) than average. Limited effect to related crimes Despite legislation to reduce money laundering and related crimes, there is almost no evidence to suggest the current system or AML is, in fact, reducing money laundering. Fintech has been attempting to address these problems, with some success. Fintech solutions such as online international transfer services, savings, and investment apps, and mobile money for underserved markets have begun to improve the situation. However, the change is incremental, and is still built on top of a system that fundamentally requires the overhead of agents to provide trust. While some of the costs can be reduced, fundamentally, fintech can’t address the underlying issues of lack of transparency because it is dealing in the same financial instruments and going through the same major institutions as traditional finance.