Decentralized Finance: Why It’s the Next Big Thing in the Cryptocurrency Industry
The talk about decentralized finance (DeFi) started in 2019. What is DeFi: a new trend or a disrupting technology in the cryptocurrency industry? In our new blog post, we’ll uncover the concept of decentralized finance, its pros and cons, and use cases. If you’d like to jump on the DeFi bandwagon, read on.
What is decentralized finance anyway?
Decentralized finance is an independent ecosystem that allows users to control their financial assets without government institutions or banks involved. DeFi is based on blockchain technologies, mostly Ethereum.
Ethereum was the first to create and popularize smart contracts – a protocol scheme that enabled contract signers to pay out digital currencies securely, confidentially, and without legal nitty-gritty details. A smart contract includes a set of liabilities and protocols that bring those liabilities to action. Simply put, two parties can sign a digital contract with automatic payment of funds after all prerequisites are met. On top of that, signing a smart contract doesn’t involve any intermediaries.
How are decentralized finance and smart contracts linked? Basically, the idea of DeFi is built upon smart contracts and automation of financial agreements without extra paperwork and time investments.
Is DeFi as flawless as it seems? Let’s find out below.
Pros and cons of decentralized finance
The following are advantages of DeFi:
- Lower or zero commissions as there aren’t traditional intermediators between the parties. Thus, contract signers save money on every transaction.
- Complete control of funds since the rules of resolving disputes and handling transactions are specified in a smart contract. Once the smart contract is digitally signed and brought into action, the DeFi app needs minimum human intervention.
- Decentralized finance technology strives to eliminate the intermediators and monopolists like government institutions.
Along with that, decentralized finance, just like any other technology, carries certain risks and drawbacks. They include:
- Elimination of intermediary and government institutions gives you more control over your finances but eliminates the protection of your funds by government and law system.
- Basic knowledge in the field of blockchain\cryptocurrencies and finances
- Smart contracts, as any software code, can have bugs inside, which can lead to loss of your assets
DeFi is a relatively new technology. That’s why there are just a few successful use cases so far. Currently, decentralized finance is widely applied in the cryptocurrency industry for initial coin offerings (ICO). However, DeFi is also used for traditional financial transactions like asset management, lending, and insurance.
Use cases of decentralized finance
- Lending and borrowing
While the classic lending ecosystem imposes multiple limitations and requirements (for example, the level of wages and guarantors), DeFi lending and borrowing platforms eliminate the middleman and guarantee the outstanding speed of deals and lower commission rates. They also offer lending protocols in which the interest is paid in stablecoins and cryptocurrencies.
The most popular DeFi lending platforms are Dharma, Compound, and BlockFi. They support popular cryptocurrencies like DAI, ETH, and USDC. The interest rates on these platforms vary depending on market dynamics.
- Asset management
Asset management tools act as asset custodians. DeFi provides cryptocurrency owners with digital wallets that help them easily manage their crypto assets. Since common asset management operations like collateralization and liquidations are automated, users don’t need to dig into complex concepts.
Ownership of the financial assets in DeFi asset management can’t be revoked. The assets stay in the owner’s digital wallet. Besides, the user’s location or local tax regulatory politics don’t impact the assets.
As DeFi Saver, Zerion, Melon, and InstaDApp offer decentralized finance and asset management to their users. Most of them support several web3 wallets, offer advanced analytics and reporting, and optimize the different protocols’ assets.
Transparency of transactions and no middleman creates the perfect landscape for issuing mortgage loans and insurance, replacing classic contracts and paper routine with secure smart contracts.
DeFi insurance services are attractive to cryptocurrency owners as well. The DeFi platforms offer insurance of private keys and digital assets and guarantee their security. Moreover, DeFi insurance protocols are compliant with smart contracts and digital asset insurance policies.
Among scarce DeFi insurance platforms, we can name Nexus Mutual, Etherics, Opyn, and VouchFor Me.
Nexus Mutual is one of the most prominent players in the DeFi insurance field. This decentralized Ethereum-based insurance protocol allows users to purchase insurance coverage or participate in the risk-sharing protocol. Before participating in the risk-sharing protocol, users had previously invested in Ether tokens. The investments are returned in the NXM tokens.
DeFi is gaining its traction in the cryptocurrency industry. Even though currently there aren’t too many real cases of decentralized finance technologies, we can see the interest of the industry experts in cutting the middleman and introducing us to a new digital economy.
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