Revolutionizing microfinance: a blockchain-driven decentralized finance (DeFi) model for collateral-free loans

Abstract

Microfinance, providing essential banking services to low-income and unbanked individuals, faces numerous challenges such as high-interest rates, cumbersome intermediary processes, and lack of transparency. Decentralized Finance (Defi) has recently been identified as a transformative technology with the potential to ameliorate these concerns and advance microfinance. In this paper, we present a layered Decentralized Application (DApp) designed using Defi to alleviate the security issues intrinsic to conventional microfinance. Our model enables uncollateralized lending to the unbanked population, thus tackling one of the significant barriers in traditional microfinance. In addition to discussing its design and architecture, we demonstrate the DApp on the Ethereum (ETH) network that supports open-source DApps. We then propose a detailed roadmap to reduce intermediaries, lower costs, improve loan accessibility, and engender a more transparent lending environment using blockchain technology. We also examine sustainable methods for uncollateralized loans in the microfinance space, focusing on regions such as Bangladesh. This research underscores the transformative power of Defi and blockchain in reshaping the microfinance landscape.