Anyone who has an interest in blockchain technology has probably heard about decentralised finances (Defi). These are the blockchain-based innovations that look to revolutionise the global finance industry. Here is what you need to know about Defi technology and its use.
What is decentralised finance technology?
Decentralised finance (Defi) is an alternative from the traditional, centralised financial system enabled by public blockchain technology to provide all kinds of financial services. Defi technology has a wide range of financial instruments ranging from borrowing and lending platforms to tokenised BTC and stablecoins.
Unlike the traditional financial industry run by central authorities and financial institutions, Defi runs on decentralised blockchain technology with no single authority. Most of the Defi platforms are currently deployed on the Ethereum network.
Defi comes with various benefits such as programmability, immutability, interoperability, transparency and self-custody. With over 1.7billion in the world unbanked, the Defi platforms can be the needed solution the financial industry has ever needed.
What are the Defi use cases?
Defi has disrupted the traditional financial industry. Other than the regular financial practices, it has also innovated various financial concepts like synthetic assets never seen before in the industry. Here are some of the top Defi uses;
Asset management
One of the leading pros of using the Defi is complete control over one’s assets. Most Defi projects allow one to manage their assets as they determine the buying, selling and transferring of their digital assets. Full control allows earning interest from these assets as well.
The Defi also comes with the necessary privacy. Projects like MetaMask, Gnosis Safe and Argent allow for data encryption and storage on personal devices for only the user to access.
Compliance and KYT
The traditional financial system has looked to solve money laundering and terrorism financing through the Know Your Customer(KYC) protocols. However, these work counter to customer privacy guidelines. Defi, on the other hand, focuses on the Know Your Transaction (KYT) protocol. It focuses more on the nature of the transactions than the person behind the transactions. This helps in real-time transaction monitoring hence protecting against fraud and other financial irregularities.
Decentralised Autonomous Organisations (DAOs)
DAOs are organisations that operate based on various laid down rules on smart contracts on the Ethereum platform hence no need for any central administrative entity. Various entities within Defi like Compound and Maker have introduced DAOs for fundraising, decentralised governance and managing financial operations.
Data and analytics
The transparency in Defi protocols allows for access to all network data and transaction activities. The data is then analysed to make informed business decisions, discover new financial opportunities, and risk management.
Already various data analytics dashboards like Defi Pulse and CoDefi Data have come to provide Defi users with the needed details from data analysis.
Insurance
The insurance industry has been struggling with various concerns such as cumbersome paperwork, bureaucratic claim procedures and outdated auditing systems. Insurance companies can use smart contracts to automate most processes. This would allow Defi to operate as the leading financial solution.
Borrowing/Lending
Defi has become a popular system due to its ease of lending compared to traditional financial institutions like banks. The defi platforms offer crypto loans in a trustless manner, without any intermediaries. It also allows the crypto holders to list their token for lending.
The defi platforms allow P2P borrowing platforms where a borrower can directly take loans as needed. At the same time, defi platforms allow lenders to gain interest on their assets.
Defi lending utilises the blockchain technology to provide a transparent borrowing system with third parties. The straightforward borrowing process is quite convenient while the censorship-free platform eliminates any form of preferential treatment and ensures immutability.
Some of the most popular defi lending platforms include Compound and Aave.
Synthetic assets
Synthetic assets are a combination of cryptocurrencies and traditional derivative assets. That is to say, they are tokenised derivatives. In traditional finance, derivatives allow one to trade an asset without having to own them. The trade gets to gain from the price fluctuations of a stock or bond they don’t own. Synthetic assets improve the tokenised derivatives by introducing them into the blockchain technology and creating a token for them.
Derivatives have become popular in the crypto world as they allow investors to gain from fluctuating token prices without having to own them. Defi are some of the leading pushers of synthetic assets for the crypto community as they provide a wide range of solutions.
Some of the most popular Defi that operate as synthetic assets include MarkerDAO and Cream Finance.
Defi Exchanges
Defi exchanges (DEX) is a type of defi application that allows users to borrow or lend money from others, insure themselves against risks, trade cryptocurrencies and earn interest from savings in accounts.
Unlike other regular crypto exchanges, the defi exchanges do not operate custodial wallets. Instead, the platform’s users connect through web3 browser extensions like Binance Chain wallet, and MetaMask. One can then straight away start exchanging cryptos once connected.
The defi exchanges provide an easy to use platform with multiple use cases. Also, unlike other exchanges that operate custodial wallets, Defi exchanges do not have to follow any Know Your Customer (KYC) protocols hence, they are easier to get started trading.
Other use cases
As a revolutionary financial system, Defi has non-exhaustive use cases. Some additional uses include; improved digital identity, P2P borrowing and lending, and payment solutions. It can also be used in other blockchain platforms like gaming, margin trading, savings, stablecoins and prediction platforms.
Bottom Line
With multiple use cases, it is evident Defi is the future of the financial industry. It will keep on expanding with even more revolutionary financial solutions. It however, needs to first move past various challenges like scepticism due to lack of customer education and limited access.
