The financial industry is constantly evolving and, as the global economy becomes more digital, the trend towards decentralized finance shows no sign of stopping. Since its rise in popularity in 2020, people all around the world have become a part of the alternative financial industry that offers the same services and instruments that were previously completely controlled by traditional financial institutions like lending, deposits, investments, and trading.
Interest in DeFi has more than tripled in 2020. Research has shown that Bitcoin was the first decentralized financial instrument and concept was built on by Vitalik Buterin and his partners who created Ethereum and smart contracts. In a very short time, decentralized finance has attracted billions of investments and thousands of new projects. According to DeFi Pulse, the industry has a capitalization of more than $12.4 billion with the figure almost reaching 15 billion at its peak.
Along with development of DeFi itself, another major achievement within the industry is the development of decentralized exchanges (DEX). The main difference between DEX trading platforms and centralized ones is that the former does not have an intermediary between the seller and the buyers. Because of the growing popularity of DEX, centralized cryptocurrency exchanges have seen their trade volume decline in favour of decentralized exchanges. The combined trading volume of the ten largest decentralized exchanges hit $ 30 billion in early autumn 2020. These are dramatic statistics for such a new sector. DEX, on the other hand, continues to have issues with market making.
It’s no secret that many experts and laymen relate the surge of DeFi’s popularity to the Bitcoin rally of 2017. DeFi is a new sector that draws a lot of “quick money seekers.” People can make a lot of money trading in crypto, but they can also lose a lot of money. DeFi, like cryptocurrencies in the “Age of ICO,” is attracting a lot of scams. Along with truly high-quality products that address pressing issues, the market is flooded by short-term projects whose primary goal is to generate money. In most situations, the project team is unconcerned about the project’s future. Overall, DeFi is still a work in progress. There are various reasons for this, including the technology’s freshness, which indicates a high number of early defects; restricted development funds; and the lack of experience among the founders and developers of DeFi firms. Technical flaws, it turns out, limit the potential of truly amazing technologies.
While we have looked at the potential and the possible drawbacks of DeFi, let us now look at some popular use cases of DeFi that have impacted the financial world.
The most prominent and prevalent use case in DeFi is borrowing and lending. It enables customers to apply for a loan even if they do not have a formal bank account. There is no need to obtain a lender in some DeFi-based applications. Instead, the smart contract serves as a lender in this case. In addition, the loan’s interest rate is determined entirely by supply and demand. As a result, DeFi-based applications simplify borrowing and lending for all customers. Secondly, by using a decentralized finance ecosystem, people can have full ownership of their digital assets. Along with that, they can interact with peer-to-peer applications securely and they can also trade their digital currencies by using any cryptocurrency wallet.
Decentralized exchanges (DEX) – which have become popular in the DeFi space – also eliminate the need for a third party in transactions. A decentralized exchange is a peer-to-peer trading platform that allows users to conduct peer-to-peer cryptocurrency transactions without the involvement of an intermediary. Since the funds in DEX are not in the control of the owner of the exchange, users have complete control over their digital assets and other necessary funds. As a result, many decentralized crypto exchanges are seeing an increase in their user base right now. This has enticed many aspiring firms and entrepreneurs to use a type of decentralized exchange software to launch a decentralized crypto exchange. This type of software makes it simple to set up a feature-rich decentralized trading platform. High-level security protections also come standard with these types of platforms. As a result, they aid in the prevention of hacking, cyber-attacks, and cyber attacks. As a result, the DeFi ecosystem in DEX platforms provides a safe environment and improved operations.
The fourth most popular use case for DeFi is identity management. Many people will be able to access a true economic system thanks to DeFi protocols linked to identity systems. It functions as a key, allowing people to lower their collateralization obligations. It aids in the acquisition of trustworthiness through reputation and financial endeavors rather than wealth and housing. Along with free access, it also provides data privacy and identification information. As a result, any user with access to the internet can use DeFi-based applications from anywhere. DeFi also helps with insurance. Insurance is a type of contract in which a person is financially protected against a company’s losses. All financial losses are covered by these insurance plans.
When it comes to DeFi insurance, the risks of smart contract vulnerabilities and other breaches remain high. However, we can anticipate that, in the coming years, DeFi insurance will be offered to everyone without any risks or concerns. Finally, many blockchain developers have created DeFi protocols for various industries as a result of the buzz around the DeFi space. Ethereum-based blockchain games are now gaining traction in the DeFi ecosystem. These decentralized (p2p) blockchain-based games have more creative models and are entirely built on the decentralised (p2p) blockchain network. Pool together, for example, is a popular DeFi-based game on the market. It allows users to deposit DAI stable currency to purchase premium lottery tickets.
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I’m a highly experienced and well-respected author in the field of cryptocurrency. I have been involved in the industry for over 5 years and have written extensively on the topic, both for academic and general audiences. I’m highly sought-after as a speaker and consultant on cryptocurrency, due to my in-depth knowledge and understanding of the industry. I’m also a regular contributor to leading industry publications.
Emie Kohler