Modern digital payment solutions suffer from one main issue. They are all centralized. Whether it PayPal, Venmo, or banks, all payment methods involve a middleman. And although sometimes that middleman doesn’t charge fees, your data and spending habits can be bought and sold to other companies in order to advertise to you. The entire global financial system has two main issues, too much government, and too much corporate control. These issues have forced privacy-focused companies and individuals to create a decentralized financial system that doesn’t allow for centralized powers to take advantage and financially hurt individuals.
Forbes describes DEFI as, “short for decentralized finance—it’s the notion that crypto entrepreneurs can recreate traditional financial instruments in a decentralized architecture, outside of companies’ and governments’ control.” (1) Advocates of Defi claim that decentralizing finance decreases the influence of central governments or companies and decrease their ability to discriminate against different races or classes. The rise of Defi is leading the way to completely erase racism and classism from our financial system.
Let’s use a real-world historical example. The United States had a history of redlining that intentionally segregated neighborhoods. According to Investopedia, “Redlining is a discriminatory practice that puts services (financial and otherwise) out of reach for residents of certain areas based on race or ethnicity. It can be seen in the systematic denial of mortgages, insurance, loans, and other financial services based on location (and that area’s default history) rather than on an individual’s qualifications and creditworthiness.” (2) This historic practice, which is no considered to be illegal shaped many American neighborhoods and to this day segregated neighborhoods exist across the nation.
Now, let’s implement an aspect of Defi and see if redlining could have been avoided. (Although the technology was not available at the time, using a real-world example can show us how Defi would work in a system that has racism and classism.) Defi networks use something known as a “smart contract” to set rules and parameters in order to create a financial exchange. Investopedia defines a smart contract as, “a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network.” (3) In this case, any bank with a smart contract could offer a mortgage to anyone if they fulfilled the credit score requirements and they would not be able to discriminate based on race or class.
Although Defi cannot fix past situations of racism, sexism, and classism, it can go a long way in eradicating future instances of financial discrimination. Centralized organizations such as governments and companies can discriminate with little to no consequences, however, by its very nature, Defi was one objective, to execute the instructions it is given. And while Defi can technically have racist or sexist source code, it is unlikely one would be made. The fact of the matter is, Defi’s decentralized nature makes it less likely to take advantage of anyone since there is no incentive to do so.
Using that one example, I was able to present how and why Defi could potentially lead the way to decrease classism and racism in our financial system. No financial system is perfect and there will be bad actors within the most ethical economic systems, however, Defi, and its decentralized nature makes any financial abuse of someone else, extremely difficult to commit.