Fixed-Yield DeFi: The Bridge to Financial Inclusion or Another Wall?

Is DeFi doomed to make the same exclusionary mistakes as TradFi? That’s the 27 billion dollar question that has me waking up at 3am. Of course, now we are in the washout phase and experiencing the rise of fixed-yield DeFi protocols. Structures reflecting real world traditional finance (TradFi) such as zero-coupon bonds and interest rate swaps are growing in prevalence. On the surface, it seems like progress, a sign of DeFi maturing. What I do worry about is who this “maturity” is actually intended for.

DeFi's Siren Song: Stability or Stagnation?

The attraction of fixed yields, of stable gains in the fast-paced universe of crypto, is impossible to overlook. It’s a feature of its design to attract the institutional investors, the large market players that require certainty at their bottom line. That’s where the concern starts. Are we indeed creating a system where the comfort of the established institutions trumps the convenience for the underserved? Are we trading away the transformational promise of DeFi on the sacrificial altar of TradFi approval?

Think about it like this: Imagine a local farmer in rural Bangladesh seeking a small loan to improve their irrigation system. Though variable-yield DeFi is fraught with risk, the potential for higher returns could dramatically change their quality of life. Unlike fixed-yield products, which mostly cater to large institutions, often offering lower investment return. This approach risks missing the mark when it comes to what’s really important to this farmer.

Forgotten Voices: Are We Building for Everyone?

That’s why my work more broadly is dedicated to connecting South Asian communities, both in the region and diaspora, to the burgeoning global crypto economy. What I have witnessed firsthand is the transformative power of DeFi in empowering individuals and small businesses in developing economies. This power hinges on accessibility.

These new fixed-yield products are laden with convoluted features, such as zero-coupon bond substitutes and graduated risk gradients. This complexity is more than confusing; it can be downright intimidating for the layperson. It’s about as far away from the intuitive interfaces that first attracted users to DeFi as you can get. Are we building a system that you need to have a financial PhD to understand? If that’s the case—and I suspect this is often the case—we’re not really building a bridge; we’re building a wall.

We need to make sure that any benefits fixed-yield DeFi might bring don’t accrue just to big, institutional investors. How can we modify these protocols to reach populations that have been historically marginalized?

• Stablecoins: Democratize access to stable, fixed-yield opportunities.
• Micro-lending Platforms: Connect lenders directly with borrowers in developing economies, fostering financial inclusion.
• Subsidized Education Programs: Empower communities with the knowledge and skills to navigate the evolving DeFi landscape.

Echoes of the Past: TradFi's Mistakes Revisited?

TradFi has a long history of excluding marginalized communities, of building out products and services that disproportionately harm the marginalized and underserved while enriching the elite. Or are we doomed to make the same mistakes all over again in DeFi? The rise of fixed-yield products, while seemingly innocuous, carries the risk of concentrating power and resources in the hands of a few.

Look at early crypto bonds, such as LuxDeco's cryptocurrency-denominated bond and the Inter-American Development Bank's (IDB) digital bond in pound sterling. These creative efforts frequently only reach a narrow band of highly-skilled investors. Consequently, they tend to prioritize the needs of larger, non-local players.

The first wave of fixed-rate protocols, including Notional Finance and BarnBridge, struggled. Low yields and a fragmented liquidity market limited their ability to take off. Pendle’s yield tokenization offers a freer form. We need to be on guard to make sure that this innovation really does translate into authentic financial inclusion.

To realize the promise of DeFi for all, we’ll need smart policies and initiatives that advance equitable access to DeFi. Regulatory sandboxes can help advance innovation, while protecting the most vulnerable users. We must continue to push for policies that address the growing economic divide and uplift all communities, especially those that have historically faced marginalization.

The real question is whether fixed-yield DeFi as we knew it is possible. The question is whether it's equitable. If we don’t make financial inclusion a priority, we run the danger of constructing another wall, another apparatus which serves to buttress current disparities. Let’s not build the DeFi, with all its potential, to be another tool of the rich and powerful. Let's build a bridge, not a barrier.