Why is there so much craze for DeFi in the market? What makes DeFi the hottest topic in the crypto space right now? Why do people get attracted towards DeFi rather than traditional finance that has been in existence for a long time? The answer to all these questions is to get to know the potential of DeFi. Decentralized Finance has a number of use cases and here are some of which are on par with excellence.
DeFi ecosystem constitutes a wide variety of applications, of which, the open lending protocols are the most popular types. These borrowing and lending platforms are open and are decentralized. The applications are permissionless and it is open to everyone to participate. Also, there is no centralized authority governing it. These applications have many advantages when compared to traditional finance systems. These applications are capable of providing lightning-fast transactions and collateralization of digital assets. This enhances the standard of existing fintech systems. Just think of making a transaction in a few minutes when compared to the banks or other third-party payment processors that may take up to 2–5 business days for completing the transactions.
These applications are built on the blockchain, and they inherit the characteristics of blockchain. They offer high security through cryptographic verification methods. These applications being deployed on public DLTs, do not require any trust for their operation as there are no intermediaries, and everything is peer-to-peer. Thus DeFi becomes a place that offers borrowing and lending without any counterparty risk, also it makes them faster, and cheaper. You need not pay filthy commissions like in the traditional financial structures like banks.
The literal meaning of DeFi applications is that they are financial applications, so obviously, monetary banking services are a use case of DeFi. The type of services that fall under this category is insurance, mortgages, and stablecoins.
Along with the increased usage and craze for blockchain in the market, the focus on the creation of stablecoins has also gone high. Stablecoins are nothing but a type of crypto asset whose price is stable, which is achieved by pegging them to real-world assets. The main advantage of these asset pegged stablecoins over the traditional assets is the ease of transfer. These stable coins can be transferred digitally across the world in a seamless way.
The major drawback with the traditional crypto assets its volatile nature. They experience a lot of price swings, and the purchasing power of the assets fluctuates. So, they are not suitable for everyday use. For this context, stablecoins were introduced, which can be adopted for regular use as digital means of transactions. The purchase of services and products using stablecoins is fair due to the fact that the value of stablecoins never drops.
Also, in the case of traditional mortgages, the number of intermediaries involved in the process is high, escalating the cost and time consumed. But in DeFi based mortgaging, the human power is replaced by smart contracts, which completely automate the task and gives no room for filthy commissions and errors. The blockchain-based insurance eliminates the intermediaries and results in a lower premium with no compromise in the quality of services.
This section of the DeFi applications gives more room for innovation in the financial and investment sectors. This disrupts the flow of how traditional financial markets work. The most crucial decentralized application is the decentralized exchange (DEX) that allows people to trade their crypto assets without having to place trust in anyone. There is no centralized governing body in these exchanges. The user can trade directly between wallets, which are made possible with the help of smart contracts. The fees associated with the decentralized exchanges are very low compared to the centralized exchanges due to less need for maintenance and less human power involved. The ultimate aim of decentralized exchanges is to eliminate the single points of failure. This allows traders to enjoy complete control over their assets by cutting out the custodians.
These are only a few leading use cases of the DeFi in real-time. DeFi is in the phase of innovation and in the near future, almost all the traditional systems will be replaced by DeFi.