How Financial Technology Can Help Move Us Closer to Wealth Equality Decentralized finance could help decrease wealth inequality around the globe.
By Pui Ki
Opinions expressed by Entrepreneur contributors are their own.
The phrase "wealth inequality" may sound like something only progressives or activists are fond of using. However, it is a reality experienced by countries all over the world. The gap between the rich and the poor continues to widen even amid increased access to education and income opportunities.
Throughout 2020, the wealth of billionaires grew even larger while many of those in lower-income brackets found it difficult to get by due to the pandemic as restrictions in movement and travel have led to many establishments and industries limiting their operations.
The United Nations and various other organizations have been proposing solutions to address the wealth gap. However, attaining significant progress on this front continues to be elusive. There is a lot more that needs to be done — more approaches, better strategies, and possibly new paradigms under new technologies.
One emerging innovation in the world of finance that is worth examining in the search for a solution to wealth inequality is decentralized finance or DeFi. Writing for Global Policy Journal, economists Marion Laboure and Juergen Braunstein characterize DeFi as "an opportunity to democratize finance and decrease wealth inequality." It can provide a force for good that helps advance the goal of closing the wealth gap and improving the lives of many.
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New decentralized roles
Essentially, DeFi is like the traditional financial system but without the intervention of institutions that regulate transactions, policies, products and services. It is designed to enable freer markets that cannot be controlled or influenced by large institutions for the benefit of a few. It somewhat exemplifies the laizzes-faire principle of economics — the free market without intervention from central control.
With DeFi, middlemen are not necessarily completely eliminated from the financial picture. Instead, they assume new roles in the system rather than acting as a centralized bridge for those who save money and those who want to spend money. DeFi makes middlemen slowly turn into direct players who take advantage of the capital flows — for example, by becoming lenders or investors themselves.
Decentralized finance creates democratization in financial transactions, services, investments and other related areas. It cuts down barriers to entry for those who want to use digital payment facilities, invest their money, or get involved in other financial activities. It allows the underserved to gain access to more financial services and take advantage of credit opportunities.
While it is true that institutions like banks have somehow been serving as the bridge for financial market transactions between savers and spenders, one of the main criticisms is with regard to the fees being charged or policies that may be too restrictive for consumers. By taking away the control from powerful institutions, end-users get better access to financial services with more efficiency and lower costs.
In many ways, the current centralized nature of finance has not helped address the wealth gap. Some would even argue that it has worsened the problem. Decentralized finance is viewed as one of the viable ways to mitigate the problem. It may not be the full wealth gap solution itself, but it can contribute significantly to reducing wealth inequality.
Can decentralization help?
Democratizing financial transactions creates the benefit of increasing the flow of money between savers and spenders, or between borrowers and lenders. With DeFi platforms, those who have the resources can leverage these by directly lending their money out to those who need it.
Peer-to-peer transactions and trustless decentralized platforms make it easy to transfer funds for purchases or lending activities. It allows the transacting parties to avoid the high costs of financial services, which usually include high interest rates, service charges and various hidden fees.
DeFi particularly helps advance the following to contribute to social good.
Charity/donations
Media authenticity online
Greater access to opportunities
Charity
Peer-to-peer money transfers and crowdfunding platforms have been featured on the news and hailed as a lifesaver for recipients who may not be able to raise funds otherwise. These have provided funding to charitable causes as well as help for personal needs such as medical expenses or to support a good cause.
The direct transfer of wealth among individuals has a significant contribution in enabling wealth transfer to those in need. Tech evangelist Andre Bourque says that in the U.S. alone, charitable giving is already a $241 billion market that is largely driven by millennials. Charity work plus DeFi is an excellent combination that helps distribute wealth to those in dire need of assistance.
An offshoot of decentralization, the Non-Fungible Token (NFT) also demonstrates how the DeFi space helps support charity in ways other than decentralized fund transfers. These indivisible and unique tokens represent unique ownership of material or intellectual property, for instance, including artworks or creations. A number of art-based NFTs have been sold to raise money for charity. The $2.9 million Jack Dorsey got in selling his first tweet as an NFT was given to charity. The New York Times also donated the proceeds of the sale of an NFT article amounting to over $500,000.
Data traceability and integrity company Numbers Protocol facilitates the minting and sale of celebrity NFTs — which include collectible photos that fans can acquire and own as NFTs — for charity. The company collaborated with actor and celebrity Vaness Wu to create photos with exclusive NFTs to be sold for charity. These are featured in the NFT marketplace CaptureClub, and proceeds of the sale of Wu's NFT art will go to the Family of Joy Foundation, which aims to help children with autism.
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Creating a haven for authenticity online
In an era of disinformation, Numbers makes a difference by standing in the way of false narratives and lies by creating what it calls an "Authentic Media Network." This is a space on the internet where authentic content is secured and can speak for itself. Numbers Authentic Media Network aims to bring a brighter, more trustworthy future by challenging potentially problematic offshoots of information sharing such as fake news or false identities.
For instance, false, deceptive or misleading promotional propaganda is often used to deny the realities of equality problems and governance that leaves a lot to be desired. The Authentic Media Network is not only useful for creating and monetizing NFTs, but it can also aid the protection of social truths and expose realities that need to be changed for the betterment of society.
Without a means to ensure the veracity of content in the digital space, it's easy to churn out fake content with the intent to besmirch social advocacies, downplay global issues and promote deceitful populism. Through a media network that guarantees genuineness, the proliferation of content that promotes the inequality status quo will be reduced significantly.
More accessible entrepreneurship and investment opportunities
DeFi's growth has not necessarily been without hurdles, which include potential challenges in user experience and accessibility. However, there are innovative solutions being introduced like Flurry, which seeks to bring DeFi applications across to new blockchain networks and address challenges in usability.
The rise of decentralized finance inspires businesses to be more creative and innovative in offering new products and services to consumers. In an effort to attract more investors and consumers, businesses develop ingenious ways to make DeFi products that are accessible and easier to entice those who are not as tech-savvy.
"We think there is a lot of innovation going on in DeFi. Unfortunately, the user experience is not catching up. A lot of people would love to enjoy the high yield offered by DeFi but simply are frustrated by the experience," says Mike Ting, co-founder of FLURRY Finance and former vice president at J.P. Morgan.
"DeFi should be simple, easy to use and beneficial for everyone. Through this, the platform plans to allow everyone access the DeFi opportunities and accumulate decent returns on their investments," he adds.
Ting believes that the DeFi space together with evolving technology is set to outpace the traditional interest rate model, offering more efficient solutions that are more advantageous to consumers and entrepreneurs alike.
A pathway towards wealth equality
DeFi helps create a capitalistic society that makes it easy to help each other and transfer wealth with minimal hurdles. This is the kind of capitalistic tool that creates equal opportunities for entrepreneurs, borrowers and those who just need some funds to get by.
It is a false dichotomy to say that socialism is the key to curing the ills of capitalism. The solution can also be found in capitalism itself. By empowering consumers and transforming middlemen into innovative financial service providers, the flow of money significantly eases, creating more entrepreneurial opportunities and encouraging service improvements because of competition.
Also, it is important to make sure that social truths are not buried in the avalanche of misinformation that are regularly propagated online. It helps to have a way to validate the authenticity of content or media, especially if they pertain to social issues and policy making — decentralization and modern financial technologies happen to offer a highly viable solution.
As Entrepreneurial Studies Professor Scott Shane argued, there is nothing wrong in addressing wealth inequality — but not to the detriment of entrepreneurship.
"Policy intervention to combat inequality is easier to justify when rising CEO compensation and the wages paid to the Wall Street elite are the cause. When greater entrepreneurship among the well-to-do is responsible, the argument is more difficult to make," Shane explained.
To facilitate a more meaningful transfer of wealth, it is better to focus on helping people access financial services, invest, and pursue entrepreneurial endeavors instead of focusing on policies that readily hand out money to those in need. Decentralized finance is one viable strategy to create a pathway towards wealth equality.
