Can I achieve financial freedom with DeFi?

• A 2021 study demonstrated that the countries in the top 20 rankings of DeFi adopters were either high-income countries, countries with already developed crypto markets, or countries with developed institutional markets. 
• In developing countries, DeFi implementation in one of the options for financial literacy is estimated to provide a system similar to banking to more than 1.7 billion people.

What is financial freedom?

Many people dream of financial freedom; having enough cash, investments, and savings often symbolises a path to a desirable lifestyle and security. It is also associated with doing what you love without being driven by the need to earn a certain amount of money each year to survive.  

To achieve financial freedom, one must be educated enough to make informed decisions, spot investment opportunities, learn how to manage assets, and earn passive income. While basic finance knowledge is a must, it is important to keep up with technological innovations and their numerous financial applications. 

In this article, we are going to explain how DeFi can help you in your journey to obtaining financial freedom. While DeFi is no guarantee of this, unlike traditional financial systems, it introduces several new tools for financial inclusion and wealth creation.

If you're not familiar with decentralised finance, its main functions, and DeFi protocols, try reading this article: 'Getting started with DeFi'.

Two faces of financial freedom

While financial freedom is perhaps more easily defined on the individual level, some might say that it is two-faced. On a larger scale, financial freedom can be also explained as a measure of banking efficiency and as a measure of independence from government control and its interference in the financial sector.  

In simple terms – if authorities meddle too much, competition becomes reduced, barriers to entry become bigger, and all of that typically lowers the level and quality of available financial services. 

An ideal environment is presented by a minimum level of government interference and regulation of financial institutions. An economy is financially free if it is open to competition and associated with low levels of state intervention. 

In traditional financial systems, even at the lowest level of authorities' interference, they are still under the supervision of a central authority.

The emergence of cryptocurrencies and decentralised finance contributed to the ongoing transformation of the global financial ecosystem by fixing traditional financial services that went south throughout the years.

Centralised and decentralised finance are built on the same principle. If you are new to finance and crypto, this may sound surprising. We discuss the topic at length in this article: 'How do popular theories in economics shape crypto?'.

What did traditional financial systems do wrong?

Apart from the perils of government interference in the financial sector which can be counterproductive and lead to fraud and low levels of financial services, financial freedom is connected to financial inclusion. Basically, not being able to access financial services and investment options makes it hard to achieve financial freedom. 

This is one of the main flaws of traditional banking systems. In some parts of the world, it is harder to access financial services. Financial inclusion can be defined as efforts to make financial services and products accessible and affordable to all and remove the barriers set out to exclude individuals and businesses from participating in the financial sector. 

When talking about financial inclusion, it is significant to point out the reality of many people across the world who often receive negative responses when trying to access financial products and services. This is mainly due to the lack of a traditional credit history or a bank account.

This is a major flaw of the traditional financial industry that sets a high barrier to entry. Given that financial inclusion is a vital component of financial freedom, many individuals have not been given a chance to even try.

As opposed to a system that is becoming more closed throughout the years stands an open and permissionless digital financial system that has emerged as a beacon of change.

That’s right – DeFi offers the potential, along with blockchain technology, to right this wrong by providing numerous opportunities for anyone with an internet connection to participate in the financial ecosystem.

Why does financial inclusion matter?

Before taking full control of your financial destiny, you need to be included. There are many benefits of financial inclusion; when you think about it all these reasons are inter-connected. Let's take a look at some key benefits.

a. Reducing inequality and empowering marginalised demographics

Financial inclusion means that low-income and otherwise marginalised individuals are enabled to access financial systems and services such as insurance, credit, and savings. Having access means that they get an opportunity to manage their finances which can be a helping hand in reducing poverty. 

Apart from economic disparities, financial inclusion can help other types of inequalities such as those based on gender and age. It presents a paradigm shift in how people manage and grow wealth.

b. Fostering economic growth

The maths is straightforward here. When more individuals and businesses have access to the global financial ecosystem, they can participate more actively. An increased level of financial inclusion equals higher levels of investment, entrepreneurship, and savings which enhances economic growth and stability.

c. Financial access promotes innovation

Open access actively drives innovation within the financial industry and wider areas as it leads to the development of novel technologies and solutions that can cater to the needs of all types of users. Technological development is further linked with broader financial benefits focused on economic growth.

The rise of DeFi protocols

DeFi refers to an ecosystem of financial applications built on blockchain networks. Defi protocols leverage smart contracts and blockchain technology to provide an open and permissionless financial system without intermediaries such as brokers or banks.

DeFi is generally associated with a few essential components. The novel financial infrastructure includes decentralised exchanges (DEXs) as platforms where users trade with one another directly and decentralised autonomous organisations (DAOs) as new types of entities governed by code.

Users are enabled to earn rewards by using lending and borrowing platforms, along with participating in yield farming to provide liquidity to DeFi protocols.  To enable a greater degree of liquidity provision, DeFi platforms use Automated Market Makers (AMMs) that facilitate faster trades at lower costs.

DeFi offers exciting opportunities, yet its main perk seems to be empowering individuals and businesses to achieve financial freedom.

DeFi unlocking financial freedom

Historically in traditional financial systems, investment opportunities were typically confined to wealthy individuals or institutions. DeFi disrupts the exclusive nature of traditional investment and earning possibilities by levelling the playing field and enabling a fair chance for each user.

The emergence of the DeFi space doesn’t present a total disruption of traditional financial structures, yet it refers to a novel infrastructure that enables financial access to those who previously found the world of finance and investment to be out of reach. In simple terms, DeFi is all about financial inclusion which is a prerequisite for financial freedom.

DeFi’s vision lies in the recognition that many aspects of the traditional economy have reached a point of diminishing returns. One of the main beliefs in Western civilisation is that anyone, regardless of their socio-economic background, can move up the economic scale and create wealth. However, the traditional system left behind a large amount of people who have no means to build credit and participate in the global financial system.

Let's explain some key features of DeFi that are important when it comes to financial freedom.

a. A new accessible finance system

DeFi can be referred to as a beacon of financial inclusion since individuals can access possibilities that were previously elusive, despite their socio-economic background or geographical position. Anyone with an internet connection and a crypto wallet is enabled to participate in a wide range of financial activities.

For example, individuals in developing countries that are often unbanked are now enabled to turn to a decentralised lending pool to secure funding for their projects. Therefore, people who have been turned down by a traditional financial institution such as a bank due to lacking a credit score history or similar reasons, can access opportunities and products that weren’t generally available to them.  

Blockchain technology makes it possible for users to conduct financial transactions without the need to go through an intermediary. Traditional finance cannot provide the same because its very infrastructure requires guarantees before being able to provide services.

b. Competitive advantages

Competitive advantages of the DeFi ecosystem that are important for individual users are transparency and cost-effectiveness. Traditional finance frequently tags along with high fees diminishing individuals’ earned funds. DeFi slashes unnecessary transaction fees by enabling users to conduct transactions directly.

Blockchain technology ensures that every transaction is recorded on a public ledger. A trustless system enhances trust among users and eliminates any possibilities of malicious activities such as fraud and corruption that plague traditional finance.

c. Self-custody and true ownership

The development of DeFi wallets assumed a significant role in empowering individuals to participate in a new financial structure. Primarily, by providing them with feature-rich and secure wallets, individuals and businesses around the globe can manage their finances seamlessly.

Furthermore, a self-custody digital wallet gives users true ownership and control over their digital assets and securely transact their funds without third-party custodians. 

That’s where the popular crypto phrase of “being your own bank” comes from.

How should I approach DeFi?

The principle stays the same - you need to become financially literate. Despite all its exciting opportunities, you need to educate yourself and approach DeFi with caution, conduct due diligence, and stay informed about the constantly-evolving landscape of decentralised finance. Keep in mind that there are certain risks involved with the decentralised space, along with crypto market volatility.

However, learning about DeFi, crypto, and digital assets is a great risk management strategy. Diversifying your portfolio and staying updated with the latest developments can help you manage all those risks efficiently.

DeFi provides an example of how unified market conduct, concise risk disclosures, code audits, and data protection safeguards can replace stringent regulatory oversight and preserve the integrity and functioning of financial infrastructure.  

DeFi brings to the table transparency, auditability, and inclusion. These are powerful advantages in achieving your very own financial freedom. Yet age-old sayings such as ‘buyer beware’ and ‘don’t invest more than you can afford to lose’ apply to the DeFi space in the same manner as to traditional financial markets.