Proponents of decentralized finance say the traditional financial system is too expensive and hard to access and that "defi" will help the estimated 2 billion people in the world who are unbanked. So far, the data suggests otherwise.
The argument is that when lending, investing and other financial activities take place through the use of a smart contract on a distributed ledger with digital currencies as the payment mechanism, they can be done more cheaply and faster than through profit-oriented banks. And anyone with a smartphone can set up a digital wallet and engage in these activities using bitcoin, digital dollars or other virtual currencies.
But lately, the predominant users of cryptocurrencies and defi appear to be institutions and individuals that literally have more money than they know what to do with and are seeking higher returns.
The 2021 State of U.S. Crypto Report, which the Gemini cryptocurrency exchange released this spring, found that the average crypto investor is a 38-year-old male with an annual income around $111,000. The study found that 74% of crypto investors are male and 71% are white.
Only 15% of bitcoin holders on the eToro digital currency trading platform are women, according to Todd Baker, a senior fellow at the Richman Center for Business, Law & Public Policy at Columbia University.
“The only question, in my view, to ask about defi is, why are people pushing so hard for this stuff to succeed?” said Baker, who is also managing principal of Broadmoor Consulting. “It’s not idealism, and it’s not democratization. It’s about somebody finding a new way to make a lot of money, probably someone with a lot of capital to deploy and sophisticated algorithmic training strategies.”
A report published Tuesday by Chainalysis found that institutional investors dominate decentralized finance, which the company defines as "a class of decentralized cryptocurrency platforms that can run autonomously without the support of a central company, group or person, built on top of smart contract-enriched blockchains — primarily the Ethereum network — and can fulfill specific financial functions determined by the smart contracts’ underlying code." The company's analysis included decentralized exchanges and lending platforms. Defi activity among large institutions accelerated dramatically during the first half of this year.
Chainalysis found that more than 60% of defi cryptocurrency activity in the second quarter was made up of large institutional transactions of more than $10 million.
“The potential is definitely there for decentralized peer-to-peer lending,” said Kim Grauer, director of research at Chainalysis, which monitors transactions on the major cryptocurrency ledgers and exchanges and introduced its Global DeFi Adoption Index on Tuesday. “But when push comes to shove, we're really seeing ... a group of insiders, usually wealthy, are the big winners from defi, according to the numbers.”
Other people around the world are exploring using defi, she said.
“But my overall assessment is that it's still in a place where it's pretty much an insider's club,” Grauer said.
These are still early innings for decentralized finance, and the mix of users could change again. One thing the Gemini survey found was that 53% of women are “crypto-curious.” One could argue that of course they’re curious because they’re not investing in crypto today. Still, that data point does suggest that more women might get involved in the future.
While most crypto lending is done by centralized companies like
“Does the technology have a capability that may enable that? Potentially,” said Richard Rosenthal, a principal in Deloitte’s Risk & Financial Advisory practice. “But there is definitely a bridge to cross with traditional finance, and some of the safety and soundness principles around protecting consumers and identity and cybersecurity. There's definitely work to do. We need to see it develop and standards and regulations to be set” before defi can be extended out to everyone.
Gary Gensler, chairman of the Securities and Exchange Commission, told
Gensler said that where project participants are rewarded with digital tokens or similar incentives, defi platforms could cross a line into activity that should be supervised.
“There’s still a core group of folks that are not only writing the software, like the open source software, but they often have governance and fees,” Gensler told the Journal. “There’s some incentive structure for those promoters and sponsors in the middle of this.”
One potential benefit of defi for the underserved is that a smart contract, in other words a software-based contract that monitors a deal and takes action when a term of the agreement is violated, has no bias, at least in theory, Rosenthal said.
But much depends on how that smart contract is drawn up.
“You have to do it responsibly,” Rosenthal said. Otherwise, “you could still end up with the smart contract not delivering the outcomes.”
One fintech that says it’s using defi to help the underserved is Unbanked in Charlotte, North Carolina.
"We are taking the financial system and making it work seamlessly with the digital economy," said founder and CEO Ian Kane. The company’s app lets consumers maintain a digital wallet they can use to buy and sell cryptocurrency and make quick, inexpensive cross-border payments by buying digital currency and sending it to someone else over a blockchain, he said. It has partnered with Evolve Bank & Trust, a $712 million-asset bank in Memphis, Tennessee.
“If you need to send money to a family member in London, you can use a wire that will cost about $10,” Kane said. Sending it across a distributed ledger will cost a fraction of that price and take about five seconds, he said.
Unbanked will charge a $5 monthly fee if a user sends less than $750 a month.
Defi apps like his will soon dominate, Kane said.
“I see the future of all transactions transacting on some form of the blockchain within the next few years,” he said.
