If you haven’t heard of decentralized finance yet, you’ve been missing out on some of the biggest opportunities. Here we’ll explore its challenges, benefits, and impact.
But what exactly is decentralized finance, and how could it change the way Africa works? Here are some of the major issues you need to consider. After all, you should know the pros and cons before jumping into this new industry. Decentralized Finance in Africa
The use of blockchain technology and programmable money for economic activity can improve the functioning of the African Continental Free Trade Area. Central bank digital currencies can be backed by blockchain technology and can serve as a global, interoperable economic identity. Tokenization of assets such as land and mineral rights can be made possible using protocol use and blockchain technology. The use of blockchain technology can be used to enable peer-to-peer economic activity in Africa.
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The challenges of the traditional financial system in Africa are a significant barrier for innovation. The centralized system cannot accommodate new technologies as rapidly as fintechs can. A decentralized financial system is a promising alternative to the centralized system and can help Africa leapfrog the process of financial development. Today, decentralized finance has come a long way from its status as a buzzword among computer geeks. It has the potential to unlock a whole new industry within the African financial ecosystem.
In Africa, many adults are banking with Savings and Credit Cooperative Organizations, which are based on trust and lack the extensive documentation required for traditional financing. These organizations provide quick access to money but also charge high interest rates. The technology behind decentralized finance could change the way Africans bank and enable access to financial products for all. Blockchain-based smart contracts could thrive in decentralized finance and help African citizens gain financial access.
While the majority of African countries remain poor and slow to adopt new technologies, some are catching up and developing quickly. For example, the smartphone has opened the doors to the outside world, giving many more people the opportunity to access information and employment. Decentralized finance has been an important part of this development and has created many opportunities for Africans. While African governments have not fully embraced the technology, they are slowly recognizing the potential of decentralized finance in Africa.
Africa offers a wealth of opportunity for blockchain-powered decentralized finance. Blockchain-based networks can eliminate barriers to traditional finance systems and foster financial inclusion. Government policies against lending are also difficult to overcome. In Africa, many governments impose cruel lending policies. In addition, financial education is poor and judicial systems are weak. In contrast, decentralized finance will reclaim the power of people by creating a system where everyone has access to financial products.
Microlending platforms are also rapidly expanding across Africa, empowering individuals and small businesses with access to capital. Microlending platforms have faced criticism over the arbitrary lending processes and lack of accountability. Many of these platforms also shame credit defaulters. Blockchain-based platforms use crypto assets as collateral for loans, which act as securities in the absence of repayment. By creating a decentralized ecosystem, Africans can gain access to microlending and crowdfunding.
The emergence of decentralized finance platforms in Africa has a wide range of implications for African countries. For instance, Africa already has high smartphone penetration, fueled by a young population and poor landline telecommunications services. Furthermore, mobile-based financial services, such as digital wallets, are becoming very popular in the continent. With double-digit inflation ravaging many African economies, the importance of banking cannot be underestimated. However, the conventional banking system has failed to bridge the gap, and mobile money has quickly taken over the role of banking.
The current centralized financial system hampers fintech innovation. While fintech has a lot of potential to transform Africa’s financial ecosystem, traditional institutions can only accommodate it as fast as technology can develop. Decentralized finance can solve this problem by eliminating the intermediaries involved in financial intermediation. In addition to facilitating financial services, decentralized finance allows smart contracts and cryptocurrency to flourish. Furthermore, this kind of system can facilitate online transactions.
Impact on remittances
Decentralized finance (Dfi) combines case study research with social construction of reality (SCR). The aim of the research is to identify the gaps and holes in the literature. The most critical gaps are in payment infrastructures and correspondent banking. Hence, potential case studies were chosen from companies involved in infrastructural levels. SCR design is based on critical social science literature and case study research.
The cost of sending remittances is estimated to be as high as 8.72 percent in sub-Saharan Africa and 6.30 percent globally. This means that Kenya could save over $100 million per year by using a decentralized finance model. This is equivalent to less than one percent of the country’s GDP. By 2030, the goal is to have fees that are below three percent.
Impact on urbanization
The concept of financialization and urbanization are two of the most controversial aspects of contemporary globalization. Financialization is the practice of constructing a monetary system that rewards the wealthy over ordinary citizens. Urbanization, on the other hand, is the process of land settlement, which is produced in tension with extra-urban and intra-urban relations, particularly between households and firms that require living space and locations for production. In both cases, the definitions focus on the material and built characteristics of human settlement, and the shift of social relations and their impacts.
The existing literature has primarily focused on national political institutions, which play a crucial role in urbanization. In decentralized societies, however, subnational political institutions are playing an increasingly important role in local economic activity and urban development. In China, for example, decentralization has increased the dominance of a few large cities. This results in cities being more powerful and able to spend more public money. When this occurs, urban agglomeration increases.