Centralized finance (CeFi) has dominated the financial market since the digitization of finance. We have had to succumb to expensive financial intermediaries who bury us in paperwork and elusive operations. This impediment has spurred the blockchain/cryptocurrency movement and its growing army of devotees. Decentralized finance (DeFi) is the latest iteration of this movement. DeFi sudden and loud growth from zero to a $100 billion market is putting traditional finance off the rails. It’s too early to say that DeFi will have dominion but it’s worth paying attention to. Central banks that banned cryptocurrencies are now coerced to regulate them.
To know more about DeFi and CeFi see The New Financial System :: Decentralized Finance (DeFi) Vs Centralized Finance (CeFi)
Traditional market and crowdfunding
Bureaucracy, obscure cost structure, and huge overheads are among the few factors that are discouraging financial inclusion. Investment bankers grow rich from capitalizing on these challenges. With issues like this, it becomes difficult for the populace to partake in investment opportunities. Sometimes capable investors with a genuine interest in an asset are discouraged. Technology is making investments more attractive. One growing trend is crowdfunding.
Combining capital with other participants to invest in an asset is commonly known as an investment pool and sometimes crowdfunding. This is beneficial to investors with less capital.
Traditionally if you want to invest in agriculture you will have to supply the minimum capital required, say NGN 60,000, to an intermediary (like a licensed financial institution) and wait till the maturity period before you can collect your principal and interest. This is not really a liquid investment as you can’t have access to withdraw or transfer your stake, even to another person, at any time. If you have NGN 10,000 and have five other friends willing to make up NGN 50,000 you all can’t participate individually as you must entrust someone (or a trustee) to invest on behalf of the group. What if the trustee runs with the money or for whatever reason can’t access the account anymore? This is one reason financial institutions are heavily regulated and governed.
Startups have built platforms that allow crowdfunding for farmers and other kinds of producers, but they are all still centralized and illiquid. DeFi on the other hand makes almost all forms of investments easy but you will have to spend a lot of time reading up on it. DeFi, however, can democratize investment and Africa which will promote financial inclusions.
There are ways to simplify DeFi for a continent like Africa with poor internet and low literacy.
Liquidity on steroid – unlocking sleeping capital
DeFi orchestrates a direct relationship between lenders/investors and borrowers rather than intermediary financiers. This allows enlisting new kinds of assets and better returns than the deficient offerings of the prevailing money markets. Although peer-to-peer loaning can be liquidated, DeFi markets are designed to be liquid – investors can withdraw their funds quicker. In theory.
“DeFi will disrupt everything else; lending, exchange, derivatives, infrastructure”
– Kevin Dougherty, Atma Investment Group
One big challenge still remains governance and regulation. Recently, Switzerland licensed the Taurus digital exchange. The exchange allows clients to digitize and tokenize any type of private asset.
Platforms like Ethereum and HyperLedger opened their network to application developers. Developers can build amazing applications for the financial market, internet community, and other colonies. There are a plethora of tokens (cryptocurrencies) today. In practice, DeFi allows token holders to borrow for further speculation. There is a bright side to the volatile structure of DeFi. Investors can borrow and lend it, not just deposit it in a wallet and hope its price rise.
DeFi is building the bridge between fiat currencies and crypto. We now have tokens pegged to fiat currencies and other commodities, making the tokens more stable than their blockchain counterparts. Borrowers can put up collateral and take the risk that their underlying crypto holdings devalue. This is commonly known as tokenization. This paves the way for new horizons in finance. For example, partners in agricultural fund might market part of their stake via DeFi rather than waiting out the six-month maturity period. Farmers can create their own markets out of something that was illiquid. Imagine what this can do in microinsurance, education, and pension to mention a few.
The “borderlessness and flexibility” in this technology are amazing. Foreigners can build roads, farms, schools, and other infrastructure in my village while enjoying liquidity – they can transfer ownership or sell their stake at any time.
I believe a mixture of traditional finance and DeFi is a prudent first step for Africa. At some point, DeFi and CeFi services will converge. Some pressing hurdles to clear first are technical, regulatory, and literacy.
Big changes need a powerful hand to drive them forward. African governments have the power and influence of the law to support them. Furthermore, they have access to means with which to enforce the law and punish offenders. Offenders will not cease as long as they can profit from their actions and do not fear consequences. Although many would argue that the government is the most important factor in influencing the leap in African civilization we hunger for, I think entrepreneurs have a far greater impact.
Africa may take a long time to match the progress of other continents. It’s worth trying to design solutions that fit the culture and peculiarity of the continent. There are interesting and simple ways to design a digital currency influenced by the blockchain and without much cryptocurrency jargon in the face of end-users.
In another post, we will explore ways to democratize investment in Africa.
About TechAssembly
TechAssembly is a technology development company that works on digital transformation, tech skill acquisition, and tech talent acquisition. TechAssembly specializes in communication solutions, economic tech, FinTech, business solutions, Web and Mobile development (One Stop Shop for all technology development needs).
Our clientele includes funded start-ups and SMEs, some of which are within and outside Africa.