Projects using decentralized finance (DeFi) technologies are presenting solutions that serve as a replacement for centralized traditional financial services.
What is DeFi?
The term “decentralized finance” refers to a financial system that is not based on or organized around a central actor or institution but rather is driven by a multitude of dispersed actors and organizations that frequently cooperate or compete with one another.
DeFi (or “decentralized finance”) refers to financial services provided on public blockchains.
Decentralized finance allows you to carry out most of the things that banks do — earn interest, borrow, lend, purchase insurance, trade derivatives, transfer assets, and more. However, it’s faster and doesn’t involve paperwork or a third party. DeFi is global, peer-to-peer, pseudonymous, and available to everyone.
DeFi uses blockchain to enable “trust-less” banking, bypassing traditional financial intermediaries like banks or brokers. The main goal of DeFi is to provide a replacement for centralized traditional financial services. The best DeFi projects are increasing transparency, reducing system delays, and enhancing transaction speed and cost.
Benefits of DeFi
There are several benefits to decentralized finance which are outside the scope of traditional fiat-based financial systems. Here are some of the benefits of DeFi
- Flexible: You have the freedom to relocate your assets at any moment, without needing authorization, without having to wait for lengthy transfers to complete, and without having to pay high fees.
- Quick: Interest rates are changed numerous times each minute, and the underlying blockchain is updated each time a transaction is completed.
- Transparent: All parties can view the complete collection of transactions (private corporations rarely grant that kind of transparency)
- Accessibility: DeFi platforms are accessible to anybody with an internet connection, and transactions can take place anywhere in the world.
- Low transaction costs and high-interest rates: These are made possible by DeFi, which allows any two parties to discuss lending terms directly over DeFi networks.
Most popular DeFi use cases
The financial sector is currently experiencing a rapid transition brought on by DeFi which not only creates better alternatives to established financial methods but also innovative financial ideas. With a variety of use cases for individuals, developers, and institutions, decentralized finance has emerged as the most active industry in the blockchain realm.
Let’s examine a few of the popular use cases for DeFi:
- Decentralized Exchanges (DEX)
- Borrowing and Lending
- Gaming
- Asset Management
- Decentralized Autonomous Organizations(DAOs)
- Data Analytics
- KYT mechanism
Decentralized Exchanges (DEX)
The term “decentralized exchange” (DEX) refers to cryptocurrency exchanges that function without a central authority, allowing users to conduct peer-to-peer transactions and retain ownership of their funds. Because crypto assets are never in the exchange’s possession, DEXs lessen the danger of price manipulation, hacking, and theft.
DEX is a peer-to-peer marketplace where you may directly lend or borrow money. It has great speed, no KYC, is non-custodial, and has a low loss cost. It is very simple to use. Additionally, DEXs provide token projects with listing-fee-free access to liquidity that frequently rivals that of centralized exchanges.
Users of DEX connect via a Web3-compatible browser or DApp. You can exchange cryptocurrencies once your wallet is connected to the platform. Uniswap, the biggest DEX, processed daily trades totaling more than $1 billion.
Currently, AirSwap, Liquality, Mesa, Oasis, and Uniswap are some of the well-known DEXs.
Borrowing and Lending
The most popular usage of the DeFi ecosystem is peer-to-peer lending and borrowing.
Users of Decentralized finance can apply for a loan without having their applications reviewed or having a bank account.
Some DeFi apps eliminate the requirement for the borrower to find a lender by using the smart contract itself as the lender, with interest rates determined by supply and demand. Other DeFi applications set a preset interest rate for the loans. DeFi greatly streamlines and expedites the lending and borrowing procedure.
Gaming
DeFi’s composability has made it possible for product developers to integrate DeFi protocols directly into platforms across a range of industries. The adoption of DeFi allows game developers to employ DeFi coins to apply the newest incentive or reward models.
These games are called GameFi. GameFi combines blockchain technologies, such as NFTs, cryptocurrencies, and decentralization, with advanced gaming mechanics to create virtual settings in which users may earn money simply by playing and enjoying their gaming experience.
Asset Management
Users now have greater control over their own assets, which is one of DeFi’s most significant effects. Many of the most well-known DeFi initiatives provide users with tools to manage their assets, including the ability to buy, sell, and transfer digital assets. As a result, consumers can also profit from interest in their digital assets.
DeFi, in contrast to the traditional banking system, enables users to protect the confidentiality of their private information. Consider your financial accounts’ secret keys or passwords; you previously had to exchange that information with the appropriate entities.
The users can now encrypt and keep such pieces of information on their personal devices with the aid of several DeFi initiatives, such as Metamask, Argent, or Gnosis Safe. This makes sure that only the users may manage their assets and gain access to their accounts. Therefore, asset management is one of the users’ most useful decentralized finance use cases.
Decentralized Autonomous Organizations(DAOs)
DAOs are smart contracts-based decentralized organizations. DAOs are governing organizations entrusted with assuring the long-term success of the projects they support as well as monitoring the distribution of resources related to those projects.
The DAO can vote to make choices and has ownership over some resources (such as tokens in a treasury). Although DAOs have quite different structures and objectives, they are essential to the functioning of various DeFi ecosystem components.
DeFi projects frequently function as DAOs or are closely related to them. DAOs aid DeFi communities in decision-making and coordination for projects. DeFi projects are specifically made to have no one person or organization in charge of them.
Data Analytics
DeFi enables a new type of data analytics. It offers access to a bigger data pool because of its openness and decentralization.
You need the appropriate data and analytics tool to manage risks in your business and also to take calculated and informed risks. DeFi gives users access to data pools and enables informed decision-making. Analytics and risk management benefit greatly from the use of data analytics tools like DeFi Pulse and CoDeFi data.
Transparency and decentralization enabled users to find and assess unheard-of amounts of data. With access to this data, users can, however, improve risk management techniques, identify new financial opportunities, and make well-informed business decisions. Analytics and risk management benefit greatly from the use of data analytics tools like DeFi Pulse and CoDeFi data.
KYT Mechanism
The know-your-customer (KYC) regulations in traditional finance assist with compliance against money laundering and financing terrorism. However, the KYC procedure reveals the user’s true identity. DeFi uses the Know-Your-Transaction (KYT) mechanism to address the issue of anonymity.
Financial organizations can use KYT to collect data and determine the risk of the transactions that their clients are carrying out. It assists in identifying transactions linked to financial crime, such as money laundering and terrorism financing, and assessing transaction risks.
KYT addresses two challenges at once: monitoring the real-time behavior of transactions and preserving user privacy. As a result, KYT is one of the main use cases for decentralized finance.
The decentralized feature makes it possible to analyze compliance based on user behavior at addresses rather than user identity. The prevention of financial crimes and fraud is made possible by real-time monitoring.
Conclusion
DeFi removes the need for third parties in any financial transaction conducted over the Blockchain. It offers more than straightforward transfers; it also offers a wide range of financial services.
With several use cases, Defi is the financial sector’s future. With even more ground-breaking financial solutions, it will keep growing.
