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DeFi Has a First World Problem: Too Few Developing Nations’ Users

It’s become a consensus view that the use case for cryptocurrencies becomes stronger in emerging economies, which are more often plagued with authoritarian regimes and devaluing currencies than developed nations. If that’s the case, then DeFi builders aren’t reaching the audience that needs them most.

Developing nations made up only 10% of the biggest DeFi dapps’ top traffic sources on average last month, compared with 28% for developed nations, according to data from SimilarWeb. We tracked the top five traffic sources in the 10 biggest DeFi protocols by value locked ranked in DeFi Pulse. 

Balancer had the highest number of users coming from emerging markets, at 34%, and Uniswap  had the lowest, as all of the top traffic sources came from developed nations. The United States took the top slot in eight of the ten projects.

Granted, website traffic is an imperfect way to measure users ––website visitors don’t necessarily imply actual users of these protocols, and many of those users will be obscuring their locations with VPNs. We also only analyzed 10 protocols out of dozens, and compiled the top five traffic sources, and not 100% of the websites’ audience, out of just one month. But the results point to a clear conclusion: DeFi has a first world problem. 

DeFi is Trending 

While more users are coming from developed nations, Google trends point to rising interest in emerging markets. Nigeria and Thailand are the two countries with the most searches for  “decentralized finance” over the last 12 months, at the time of writing. 

Nigeria’s devaluing currency and young population has sparked interest in DeFi, said Ugochukwu Aronu, founder of Xend Finance, a platform which supports the operations of credit unions and cooperatives in the African nation and beyond.

“These are people who like to try out new things,” Aruno said, referring to Nigeria’s young adult population. The median age of Nigeria is 18.1, compared with 38.1 in the U.S., according to World Population Review.

Additionally the use of Bitcoin peer-to-peer networks like continue to see increased adoption among emerging markets, with local currency volume in Colombia, Mexico, Kenya, and Egypt at or near records.

Bitcoin Gateway

Increasing Bitcoin adoption should be a leading sign of DeFi adoption, as the largest cryptocurrency is often the gateway into other cryptocurrencies and dapps.

A spokesperson for Bitcoin Beach, a town in El Salvador whose main currency is Bitcoin, told The Defiant about its crypto-economy saying, “so far it is just payments but in 6 months I imagine we will see more DeFi.”

Lower gas fees in Ethereum Layer 2 scaling solutions and in other Layer 1 networks may help  DeFi adoption in nations with lower GDP per capita. 

Looking at top searching countries of Binance Smart Chain’s top DeFi protocol, Venus, emerging markets dominate, with Argentina at the top with 9% of visits in February, followed by China, Turkey, Thailand, and Peru. 

Regulatory Uncertainty

A tighter regulatory environment in more developed countries like the United States may also drive open finance adoption to emerging markets. 

FinCEN, a bureau of the United States Department of the Treasury proposed legislation in December which would require money service businesses to comply with enhanced know-your-customer and recordkeeping requirements. This includes names and addresses of counterparties. As DeFi protocols can provide neither, integrations with custodial platforms like Coinbase, may become illegal. U.S. President Joe Biden has since frozen all pending regulations from the Trump administration, including FinCEN’s proposal, but the ambiguity makes it difficult for DeFi services to move forward confidently.

The Financial Action Task Force too, whose 38 country membership is nearly void of emerging market countries, has drafted guidance, known as the Travel Rule, which would require Virtual Asset Providers (VASPs) to share information about their customers with other VASPs as well as relevant authorities. 

U.S. regulators have said most tokens are securities ––without providing a clear framework that specifies exactly which are and aren’t––, and laws classify cryptocurrencies as assets, meaning each transaction needs to be taxed for capital gain. The lack of regulatory clarity and unfriendly business environment for crypto companies may drive innovation elsewhere. 

Paving the Way

Investors and entrepreneurs are looking to meet demand for financial services in emerging markets. Aronu of Xend Finance is one such founder. 

“One of the things we’ve been able to do for them on Xend Finance is create a system where credit unions can put their funds together and save it in our system,” Aronu told The Defiant.

Aronu is from Nigeria and no stranger to inflation. The country suffered a 16% increase in its consumer price index in January. The devaluation of the Naira, Nigeria’s currency, is partially what fuels cryptocurrency’s popularity in the country.

Xend Finance deposits credit unions’ assets into stablecoins, protecting the funds from devaluation. The protocol then takes the assets and “lends it into different DeFi protocols, the best ones that will give them the best APYs,” explained Aronu, saying he’s giving customers “access to the international money markets, removing things like middlemen, removing things like banks.”

Mobile Driven Adoption

Karthik Bupathi, a founder partner of Arcanum Capital, a venture firm which launched a $10M venture fund last month focusing on supporting blockchain technology development in emerging markets, said the DeFi revolution in EM will be mobile first. 

The reach of smartphones with internet connections is soaring in underbanked populations. According to a GSMA report, by 2025, smartphone penetration will reach 80% globally, and the countries contributing to the increase include India, Indonesia, Pakistan and Mexico. India has the cheapest mobile broadband prices in the world, according to the BBC.  

“There is a market for people to build their own frontend/UI/UX that is specifically catered to their target market,” Bupathi, who is betting the winning DeFi apps will be shipped on mobile platforms, told The Defiant. “We are looking for people building projects that extend on some of the services that these foundation protocols currently cover, and really believe the growth opportunity for projects focused on UX is large as well, especially from a revenue generation standpoint.”

Dharma, which takes 10% of the interest paid to customers, but abstracts away its use of the Compound Finance protocol, are a good example of a UX-focused DeFi product.

Straight to DeFi

A common throughline between Aronu’s product and Bupathi’s vision is building on top of established DeFi protocols. There may only be lost efficiency in trying to compete with the deep liquidity of an Aave or Compound. Winning in emerging markets may mean bringing users into the existing world of DeFi through demographic-specific UX. 

Those with mobile phones but without traditional banking services, may skip right to DeFi altogether.

Aronu, whose brother has been practicing medicine in the United States for the last 3 and half years, has taken the plunge, saying since that time, “I can’t remember ever going to the bank to send cash. Everything has been through cryptocurrency. It makes life so easy.”