In recent years, Blockchain technology is disrupting every major sector of the global economy with its endless opportunities and innovative products. DeFi is one of the sectors trying to shake the traditional financial ecosystem. If you are new to this concept, then definitely you will have a question on your mind. What is DeFi?. DeFi is a recent trend in the world of fintech and cryptocurrencies. “DeFi” stands for Decentralized Finance. It is an open-source network creating a decentralized system as an alternative for all existing financial services. It refers to the financial ecosystem that is completely developed under blockchain networks.
DeFi includes digital assets, protocols, Dapps, smart contracts, and more. The primary motto of DeFi is to create a permissionless and transparent financial service ecosystem. Thus, anyone can operate using internet access without the involvement of the central organization. Also, DeFi applications are emerging all over the fintech space and provide some reliable solutions. such as lending, staking, exchange of derivatives, and more.
The current craze and hype are justified, as DeFi attempts to create an alternative to the financial systems. Moreover, the concept of DeFi has also faced several challenges. such as liquidity issues, everyday usability, lack of privacy, scalability, and more. DeFi can revolutionize the secured transactions without the involvement of any intermediate. So many startups are showing their interest in developing DeFi projects in 2020. In this article, let us figure out some quality use cases of decentralized finance(DeFi) in the real world.
Use Cases Of DeFi in 2020
There are some top potential use cases of decentralized finance which are being applied in many verticals.
Borrowing and Lending
Decentralized open borrowing and lending is the most prominent use case in the DeFi ecosystem. It permits anyone to apply for a loan without a bank account. Here, the borrower no longer needs to find the lender. Instead, the blockchain smart contract acts as a lender. Also, the interest for the loan is completely calculated based on supply and demand. But in some DeFi apps, it has a fixed rate of interest for your loans. So applying the DeFi concept will make borrowing and lending very simple and easier. Also, it saves your time and money effectively.
The open decentralized borrowing and lending have more advantages rather than the traditional finance ecosystem. Such as
- Instant transactions settlement
- Ability to collateralize digital assets
- Potential standardization in the future
- No credit check
Thus, these lending and borrowing services are completely built-in public blockchain networks. So they minimize the amount of trust required. Also, has the assurance of cryptographic verification methods. Lending and borrowing marketplaces on the blockchain network will provide some useful factors. Such as reducing counterparty risks, making lending and borrowing faster and cheaper to more people across the globe.
Monetary Banking Service
Most Defi applications are financial service-based applications. So monetary banking service is one of the great use cases in the Defi ecosystem. This service includes stable coins, insurance, and mortgages. Stablecoins are cryptocurrencies that are pegged with any stable assets. Which has a constant value according to the value of backed stable assets. Largely, there will be more intermediaries needing to be involved. So the process of getting a mortgage is kind of expensive and time-consuming.
With the use of advanced smart contracts, underwriting and fees may be significantly reduced. Insurance on the blockchain network could eliminate the need for third parties or intermediaries. Also, it allows the distribution of risk between many participants. Finally, as a result, it would provide lower premiums with the same quality of service.
As the blockchain industry is growing rapidly, there is an increased focus on the creation of stablecoins. A stable coin is a type of cryptocurrency that is usually pegged to a real-world asset, stable assets, or a basket of assets. Such as fiat currency, gold, silver, or any other digital currency. So these coins can be completely transferred digitally with relative ease. As cryptocurrency prices can fluctuate daily. So decentralized stablecoins could be entirely adopted for everyday use as a digital currency. Also, it is not issued and monitored by any central authority or third party.
Stablecoins tend to pair all the perception of blockchain with the stability and familiarity of traditional fiat currencies. Thus stablecoins help to create a quickly accessible and exciting new financial ecosystem named Decentralized Finance(DeFi). The value of stablecoin will come from various places. But it depends on what stablecoin you are describing. Currently, there are more than 200+ stablecoins developed under the ethereum blockchain.
There are some popular stablecoins in the marketplace. Such as USTD, TUSD, DAI, USDC, and more. These popular stablecoins are commonly backed to $1 with various governance protocols, degree of decentralization, and features. Since DeFi Projects on ethereum blockchain integrate different digital assets. Presently, Maker’s DAI stable coin has become the most used stablecoin in the DeFi space. Stable coins are originally generated to reduce the value volatility of the digital currency. Also, to make the blockchain as a possible payment method. Currently, these stable coins can be found in some applications in DeFi space. Such as
- remittance payments
Also, it is used for institutional applications like Central Bank Digital Currency(CBDC.).
Insurance and Identity management
Insurance is a contract and represented in the terms of the policy. In insurance, the user receives financial protection against the gigantic losses from the company. Not only big losses, but these insurance policies safeguard against small financial losses. Now let us see the DeFi concept in insurance. As DeFi is still in its beginning stage, it still undergoes risk in smart contract bugs and other breaches. So many upgraded new insurance alternatives have arrived to guide users in purchasing and protecting their holdings.
When it comes to identity management, the DeFi protocols are paired with identity systems based on blockchain networks. It is a way to help many users to access a true economic system. DeFi acts like a key that helps to reduce people’s collateralization requirements. Here DeFi provides you data privacy and personal identifying information along with open access. So anyone with an internet facility can access DeFi Dapps at any time from anywhere.
Decentralized Cryptocurrency Exchange
A decentralized cryptocurrency exchange(DEX) is the newest peer to peer crypto exchange platform. The process is very swift when compared to the traditional cryptocurrency exchange (CEX). Here crypto users can trade, buy, and sell all major crypto coins securely. DEX helps the transactions to be peer to peer with the help of blockchain technology. It makes intervention-free transactions where no mediators got involved. Decentralized Exchange acts like a distributive ledger platform where it maintains transparency. The building process of a decentralized crypto exchange involves Defi.
In DEX, control over the assets is not in the hands of the owner of the exchange. So users have full control over their assets and funds. This kind of exchange comes with the integration of tightened security features. So there is no possibility of hacking, thefts, cyber-attacks, and other fraudulent activities. Thus, the DeFi ecosystem provides secure space and better operations in decentralized exchange for all the users. There are some famous decentralized exchanges in the DeFi ecosystem. Such as Airswap, Uniswap, Atomax, bamboo relay, DDEX, and more.
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