Emerging Technologies

Why decentralized finance is a leapfrog technology for the 1.1 billion people who are unbanked

Decentralized finance is key to enabling anyone to participate in the new digital economy.

Decentralized finance is key to enabling anyone to participate in the new digital economy. Image: Unsplash/Kanchanara

Anna Stone
Vice-President, Corporate Social Responsibility, eToro
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  • Some 1.7 billion people worldwide do not have access to financial services, but 1.1 billion of those have access to a mobile phone.
  • It is, therefore, likely that many unbanked people will have their first experience of financial services on decentralized infrastructure.
  • Decentralized finance is key to enabling open access, participation and opportunity in the new digital economy for everyone.

No technology better exemplifies the “leapfrog technology” phenomenon than the mobile phone, whose adoption allowed even the most underserved communities to entirely forego the need to implement traditional telecommunications infrastructures like wire networks and landline capabilities.

Today it is estimated that 83.4% of the world's population owns mobile phones. In fact, of the 1.7 billion people that remain unbanked (22% of the adult population), 1.1 billion are reported to have access to a mobile phone. For these people, their first experience with financial services will likely happen on decentralized infrastructure.

Decentralized finance (DeFi) technology, like mobile phones, has the potential to be a leapfrog technology, enabling the underbanked to bypass traditional finance and gain access to digital services and assets previously unavailable.

Who are the unbanked?

The unbanked are defined as people that do not have an account at any financial service provider. This definition does not recognize informal sources of financial services that pre-date the modern financial system, such as community savings groups, peer-to-peer (P2P) microlending and other forms of social and community financing.

Estimates track that as much as 35% of total economic activity in developing markets happens in the “informal economy”, which is equal to trillions of dollars of “informal economic activity” operating outside formal financial services in a parallel system. Almost all of the unbanked live in developing economies with young populations.

What is decentralized finance?

Decentralized finance is a financial technology infrastructure that re-imagines financial services in a P2P model, one that is governed by computer code.

Traditionally, banks and service providers themselves are gatekeepers to access services: one needs to apply and be approved to open a bank account, use a payment application or access a line of credit.

While fintech technology, or fintech, companies have overcome the challenge of physical distance from traditional brick-and-mortar locations, accessing financial services is still difficult for those without formal government identification and proof of financial assets.

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DeFi infrastructure offers “accounts”, savings and loans, payments and investing in a model that is inherently based on technology and P2P, thereby disintermediating institutions. Capital is crowdfunded and community-sourced, financial instruments are software, and the rules of the game are transparent, based on code.

This creates a financial infrastructure that is inherently open, public, transparent, neutral, censorship-resistant and borderless. And one that is accessible by anyone anywhere in the world with only a smartphone and an internet connection.

In less than five years, decentralized finance has become a billion-dollar industry, with a market valued at an all-time high of more than $180 billion. From January 2020 to today, the number of users on DeFi has increased from about 91,000 to almost five million.

Decentralized Finance Users 1.1.2020 to 4.7.2022
The number of decentralized finance users from January 1, 2020 to July 4, 2022

Let’s be clear, the volume and activity in DeFi to date has been limited to crypto-financial applications, embraced by a crowd not-so-affectionately referred to as “degenerates”.

Decentralized finance has not yet been adopted by unbanked populations outright nor designed to serve them. But the data on cryptocurrency adoption gives us reason to watch DeFi adoption rates up close.

Emerging countries ahead on cryptocurrencies

Emerging countries are ahead of every developed nation except the United States in adopting, mining and trading cryptocurrencies. Many of these crypto-hungry countries have a high proportion of unbanked residents: four of the seven nations with the highest concentration of unbanked adults are the countries leading crypto adoption (China, India, Pakistan, Nigeria).

Globally, even in developed economies with advanced financial services industries such as the US, unbanked and underbanked populations have relatively higher adoption rates of cryptocurrency ownership compared to those that are fully banked.

2021 global crypto adoption index decentralized finance
The 2021 global crypto adoption index Image: Chainalysis

The unbanked today will never be “banked” – they will leapfrog directly into decentralized financial services. Three primary drivers fuel this prediction, which are:

The open, permissionless nature of decentralized finance

Anyone can create a blockchain wallet – the critical technology that enables anyone with a mobile phone and internet connection to access blockchain native financial services and global capital markets via DeFi rails.

The blockchain-based digital wallet functions as an “account” that can be used to send, receive, save and invest digital assets. This acts as a gateway to receive and transact in foreign currencies and get exposure to global capital markets.

It is no surprise that in economies like Argentina, Venezuela and Nigeria, large swathes of the population opt to get paid in digital currencies and move wealth into decentralized digital currencies such as bitcoin and ethereum. The permissionless nature of crypto makes it the most diversely held asset class in the world.

DeFi improves upon existing P2P community financial models

Decentralized finance innovations on community-based financial structures can provide safer, more convenient, and reliable solutions that improve upon existing informal, social financial infrastructure.

P2P exchange is already driving the adoption of crypto in emerging markets for people who do not have the ability to on-ramp via centralized financial institutions. DeFi-based models for savings and loans are likely next. Savings groups are a commonly implemented community-based approach for saving money and issuing loans to benefit those in the community.

A DeFi-based approach provides several benefits: digital payments are safer and easier to track than physical cash and manual ledger keeping, while automation of payments and withdrawals ensure fairness and transparency for all members.

Digital community funds could be invested seamlessly, unlike cash, and savings communities no longer need to be limited to geography. All of this on-chain data creates traceable, auditable credit histories, which could potentially serve as a bridge to larger amounts of capital from external borrowers.

The benefits of crypto universal basic income

The growing interest in crypto universal basic income is evidence of a widening realization that blockchain provides the ability to distribute money efficiently to people directly at scale, and decentralized finance provides efficient pathways to funding and distributing capital over time.

With more than one billion people living on less than $1.90 daily, these big ideas are gaining acceptance as a sensible business model for humanity. Recently, a range of different approaches have reached new stages of viability.


GoodDollar and Impact Market have collectively onboarded more than 500,000 members to non-custodial wallets and distributed crypto UBI, primarily from countries such as Nigeria, India, and Indonesia. Recipients have used the funds for peer-to-peer exchange, fund basic needs, and explore DeFi instruments such as savings groups.

These projects are bridging the gap between decentralized finance infrastructure, assets and the underbanked and have viral potential to accelerate adoption.

Challenges to decentralized finance adoption

The real risks and challenges to decentralized finance adoption can’t be overstated. Financial literacy is a start, but it is not enough – while holding crypto in a digital wallet seems simple enough, DeFi products and assets today are not yet designed to serve vulnerable populations. Basic literacy remains a problem, and 37% of the world still does not have ubiquitous and affordable web access – a prerequisite for further progress.

The volatility of crypto assets also poses existential risks: with the possibility of losing 72% of its value in a year, even the most mature cryptocurrencies pose a huge threat to those living pay cheque to pay cheque. Without clear regulations and guardrails, lack of consumer protection and market volatility will always pose a threat to DeFi adoption. Adoption depends on more than mega-trends.


How is the World Economic Forum promoting the responsible use of blockchain?

The impact of leapfrogging to DeFi goes well beyond just removing the middleman. It enables more open access, participation and opportunity in the new digital economy. It also has the potential to make more accessible established financial principles and products, as well as empower communities with capital formation that typically have not had access to it.

Decentralized finance has laid the foundations of propelling a truly decentralized global economy that the unbanked can easily embrace and participate in.

Thanks to Kitchain.xyz for their contributions.

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