Decentralized finance has witnessed enormous growth since 2019. There are more than $10 billion locked in Ethereum DeFi protocols and more than a hundred users. DeFi’s financial services range from digital assets to smart contracts.
Digital asset staking, open-lending platforms, DEX platforms are some of the use cases of DeFi today. Even though there are many utility services that DeFi protocols offer, there are many scams and losses; hence users need to interact carefully with DeFi protocols.
DeFi allows participants to manage their digital assets and control their finances without the need for intermediaries or financial institutions. DeFi helps to bank the unbanked and unlock different ways to earn a passive income. Keep on reading this post in order to understand some significant use cases of DeFi.
What is DeFi?
Decentralized finance (DeFi) shifts from centralized banking to P2P finance backed by decentralized technologies based on the Ethereum blockchain. DeFi allows the borrowing and lending of digital assets without the need for intermediaries.
DeFi differs a lot from traditional banking due to the fact that banks work accordingly to financial authorities and institutions that stand as intermediaries. The DeFi space is a paradigm shift in the economic structure, and it presents lots of opportunities. If you want to read more about DeFi and how it holds countless opportunities for investors, head over to our extensive guide.
Benefits of Decentralized finance (DeFi)
DeFi leverages the critical features of the Ethereum blockchain to offer a lot of benefits, and here are some of them.
The decentralized blockchain structure of DeFi offers tamper-proof data coordination to increase the security level in the space.
DeFi features smart contracts that are highly programmable and enable the production of new digital assets.
In DeFi, every transaction is verified by users on the network. DeFi offers trust for rich data analysis. The network activity in DeFi is available to every participant today due to the fact that it is open source.
Ethereum blockchain ensures that DeFi Dapps and platforms are built to integrate and work together without glitches. Through DeFi, developers are able to create dApps on existing protocols and incorporate third-party apps.
We can define its permissionless access, unlike in conventional banks, where users need the permission of intermediaries to carry out a transactional process. In DeFi, anyone can carry out a transaction anywhere in the world, with any amount of funds. Participants can also access DeFi apps developed on Ethereum blockchain.
Participants can always have control and keep custody of their funds by using DeFi permissionless Web3 wallets such as MetaMask.
The use cases of DeFi
Decentralized finance has unveiled a new world of economic activity, from synthetic assets to Digital Asset Objects (DAO). The list of DeFi uses cases below is proof that it is much more than an emerging technology today. But an integrated financial ecosystem built on Ethereum blockchain to rival centralized banking.
Stablecoins are digital assets that have their value pegged to another currency/asset to reduce volatility and ensure stability. These are pegged to fiat currencies like the USD or Euro or Pounds sterling. It is also pegged to assets like gold.
Stablecoins are widely used in the DeFi space, and many borrowers and lenders in the DeFi space use stablecoins because of its stability. If you want to avoid instability in blockchain, then stablecoins are the best option.
Another common use case of DeFi protocols is open-lending platforms. It is important to know that open-lending platforms are simple DApps that allow participants to lend their digital assets and get rewards for it.
In open-lending platforms, borrowers need to offer collaterals worth more than the loaned amount and maintain it above the threshold value. If we don’t do it, the loaned amount returns to the lender. This takes place in order to protect the lender.
DeFi’s interoperability has unlocked new opportunities for Dapps developers to create new protocols on different platforms. Dapp games have become prominent and a notable DeFi use-case today due to their built-in innovative incentive models.
For instance, a DeFi game like PoolTogether, allows participants to buy digital tokens by depositing DAI tokens. The DAI tokens are then pooled together and lent to Compound protocol to earn incentives.
DeFi’s trust operations allow the operation of decentralized exchanges. These exchanges enable the trading of digital assets, and they operate without a centralized body. In DeFi, decentralized exchanges can come as automatic market markers that automatically set the tokens’ price in a liquidity pool.
DeFi also has decentralized exchanges such as OpenSea. OpenSea allows users to trade non-fungible tokens through smart contracts as an escrow.
Like the normal insurance policy today, DeFi also has a decentralized insurance feature that protects you from unforeseen circumstances. DeFi insurance platforms like Nexus Mutual offer services that can be used against occurrences such as hack, smart contract failure, or even a market crash.
It is essential to know that these circumstances rarely occur in the DeFi space, but once they do, decentralized insurance helps participants to hedge against them.
Decentralized insurance platforms are created using transparent smart contracts, which means that every activity that takes place on these platforms are visible for everyone to see.
In traditional banking, margin traders leverage their trades by borrowing from brokers. Whereas in DeFi, margin traders leverage their trades through decentralized lending platforms such as Compound and dydx. It is essential to know that smart contracts automate the lending process- without the help of intermediaries.
Staking is one of the widespread use cases of decentralized finance. It helps participants take part in DeFi through Proof-of-Stake protocols by allocating cryptocurrencies to a validator node or just by keeping these cryptocurrencies crypto-wallet.
When participants liquidate and secure the blockchain by staking cryptocurrencies, they earn incentives. In DeFi, participants can stake tokens such as Tron (TRX), Terzos (XTZ), Ethereum (ETH), etc.
Yield farming has become very popular in the DeFi space today. This practice has to do with locking digital assets to get rewards in return. The rewards are usually offered by smart contracts automatically.
Many decentralized platforms have launched their own yield farming initiatives in order to allow participants to stake tokens to mine digital assets. One platform that is doing this is OKEx.
Yield farming protocols always ensure participants stake Liquidity Provider (LP) tokens, which are acquired once liquidity has been offered in a decentralized exchange such as Uniswap. The LP tokens are then used to mine a new type of token in the platform.
DeFi platforms now support lots of online marketplaces that allow participants to exchange products and digital assets worldwide.
Synthetic asset insurance
One of the most complex use cases in DeFi space is synthetic asset insurance. Synthetic is a financial instrument that mimics other financial instruments, at the same time altering their main features. This is similar to how stablecoins matches to the currency that it is pegged to.
Synesthetic allows a participant to purchase the synthetic version of the asset that sells on a platform and then sell it at any spot price. Synthetics can be simple assets like gold, commodities, digital assets, or anything that has value. However, you can trade synthetic assets, allowing their holders to get vulnerable to different illiquid assets.
P2P payments are the foundation of DeFi use cases and even blockchain technology. Blockchain technology helps people in a way that they can exchange digital assets securely without the help of intermediaries. DeFi’s payments are structured to benefit both the banked and the unbanked, thus helping everyone and even financial institutions.
DeFi protocols, together with blockchain-based identity systems, allows every user to get access to its financial ecosystem. DeFi protocols the requirement involved in collaterals for individuals that don’t have extra money or finance. It also helps individuals to access users’ creditworthiness through reviews and financial activity.
DeFi doesn’t use income or house ownership as collaterals to access funds on its platform as traditional banking systems do. Decentralized finance protocols use data privacy around personal identifying information.
DeFi uses an open-source code that allows anyone with the internet to access it immediately. You can use DeFi applications and maintain control of your data and asset without any DeFi protocol problems.
DeFi protocols allow users to manage their assets by themselves. Cryptocurrency wallets like Gnosis Safe and MetaMask enable users to interact with Dapps to do everything from trading to earning incentives on digital assets. In the DeFi space, you manage your data, your seed phrase, private keys, and so on. All vital data is stored through an encrypted format locally on your device so that you can access it at any time.
If you are looking for staking solutions, insurance, exchanges, reputable financial services, the DeFi space offers all these and many more. It is essential to know that not all DeFi platforms have been tested and trusted; many are still experimenting. Hence, it is crucial to exercise diligence before interacting with any Decentralized platform not to be a victim of financial losses.