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How DeFi Can Work for India

2020-09-03

Decentralized Finance, or DeFi is a next-generation concept based on decentralized ledger technology and is powered by cryptocurrencies. It is an evolved version of traditional finance with low-costs, improved security, faster settlements, and wider range of audience.

From being cited as the main catalyst for the growth of crypto’s usage to disrupting the traditional financial market, DeFi is gaining prominence now more than ever. In this article, we’ll talk about the importance, use cases, future growth, and scope of DeFi in India. 

The Importance of DeFi for India’s Situation

The first half of 2020 has brought in severe losses in industrial productions and consumption spending in India due to the COVID-19 lockdown imposed in the country. This has resulted in thousands of SMEs going out of business, declaring bankruptcies, and doing mass layoffs. This indicates an urgent need for financial assistance for the general public.

In times of economic distress, what matters is looking after the credit crisis. The current financial system allows its users to utilize credit, although there are high filtration standards to approve credit applications, depending on their limited capacities. The traditional financial barriers of unequal access, censorship, and counterparty risks are also accompanied by the absence of uniformity in interest rates and lack of transparency; making it difficult for pandemic victims with low or no income to apply for credits or take a loan.

DeFi solves this.

DeFi is based on a distributed architecture that works with an anonymous network of nodes, to reach consensus without a central point of authority. 

It allows people to manage their wealth without having to rely on centralized financial solutions. One can draw loans, lend funds, trade/exchange assets, and even complete complex monetary transactions with high speeds and low expenses instantly without going through layers of privacy invading permissions. 

DeFi’s Use Cases 

For starters, via DeFi, one can build a borrowing/lending platform such as Compound. It allows borrowers to take loans and lenders to lend by locking their crypto assets as collateral. The interaction of demand and supply determines the interest rate, which is generated each time a new block is mined. Compound’s native token allows its users to earn interest on the money they lend while also being able to transfer, trade or use it the way they want. 

Protocols such as MakerDao allow users to lend themselves loans in dollar-pegged stablecoins such as DAI by locking ETH as collateral. The entire lending process is based on the credit theory of money, which simply means that the lended money did not exist before the loan was approved. This proves the concept of how money creation involves the simultaneous creation of debt.

Bitcoin being one of the most important and significant DeFi applications is still in its infancy, even with its current $220 billion market capitalization, hinting that there’s a long way to go before any of the DeFi products are adopted by the masses. 

The Future May Mirror The Past

ARPANET, the predecessor of the Internet, was invented in the 1960s while the mass adoption took place, around the early 2000s. 

Back in 1995, six years after World Wide Web was launched, Clifford Stoll, an American astronomer and the author of the Cuckoo’s Egg, published an article on Newsweek. 

He said, “Then there’s cyberbusiness. We’re promised instant catalog shopping–just point and click for great deals. We’ll order airline tickets over the network, make restaurant reservations and negotiate sales contracts. Stores will become obsolete. So how come my local mall does more business in an afternoon than the entire Internet handles in a month?

In 2010, Clifford said, “Of my many mistakes, flubs, and howlers, few have been as public as my 1995 howler. Wrong? Yep”

People may be looking at DeFi and crypto right now in the same way they looked at the Internet in the early 80s. Its true potential was unleashed only when life-changing solutions were invented. 

What today’s tech giants like Google and Amazon did to the Internet, DeFi can do to blockchain.

In a couple of years, when DeFi goes mainstream, the masses won’t recall centralized finance as the only medium to manage finances. DeFi will change the way we look at finance, the revolution will bring disruptions in financial data control, lending/borrowing, exchanging monetary values, affordable fintech applications, portfolio management, and more.

The Scope

India's Q2 GDP contracted by a massive 23.9% year-on-year (YoY), making it the first GDP contraction in the country in more than 40 years. These are unprecedented times. In the past 40 years, India didn’t face a pandemic this huge.

Before the pandemic, the general public did not recognize the gaps and challenges in the financial ecosystem. The pandemic gave us a sense of depth, as we realized our economies have faced unprecedented shifts.

As of now, India stands at a decision-making point in its journey towards prosperity. The economic repercussions of COVID-19 could propel tremendous reforms in the economy with high-growth tracks created by millions of jobs. A recent report by McKinsey Global Institute has identified key points for a reformation also pointing out how the next 12-18 months is extremely important for India in terms of creating employment opportunities which if not explored can risk a decade of economic stagnation.

DeFi for India doesn’t only help the 190 million unbanked population but also creates job opportunities for the 120 million that are unemployed in addition to easing remittances for India’s backbone - SMEs and MSMEs that contribute over 40% to overall exports. In addition to lowering down the costs on cross-border transaction charges of billions that non-resident Indians pay every year. 

With 1.3 billion people creating the largest democracy in the world, India has been on the decentralized journey long before we even realized it was one. The 5th largest economy in the world also boasts three decades of consistent growth, with forecasts saying it can emerge as one of the superpowers post-pandemic. 

With the second-largest blockchain developer base in the world (after the US), 200+ blockchain-based startups, and multiple state governments tapping into DLT solutions - India has already paved the way for a decentralized economy. 

We recognise India’s strength and potential to grow as an emerging technology hub. In March we collaborated with WazirX - India’s leading cryptocurrency exchange to set up a 50M Blockchain for India fund, under which we’re currently running our DeFi-focused Hackathon and Accelerator Program - Build for Bharat

If you’re an individual or a startup working on a product that can change lives, register and join us to #BuildforBharat.