More Applications of Decentralized Finance(DeFi)November 29, 2021
DeFi is short for “decentralized finance,” an umbrella term for a variety of financial applications in cryptocurrency or blockchain geared toward disrupting financial intermediaries.
DeFi draws inspiration from blockchain , the technology behind the digital currency bitcoin, which allows several entities to hold a copy of a history of transactions, meaning it isn’t controlled by a single, central source.
One of the biggest impacts of Defi is that users can now enjoy more control of their own assets. Many of the top DeFi projects are offering solutions that allow the users to manage their assets, including — buying, selling, and transferring digital assets. Thus, the users can even earn interest from their digital assets too.
On contrary to the traditional financial system, DeFi allows users to maintain the privacy of their sensitive data. Think of the private keys or passwords for your financial accounts — you had to share that information with relevant organizations earlier.
Now, different DeFi projects, like Metamask, Argent, or Gnosis Safe are helping the users to encrypt and store those pieces of information on their personal devices. This ensures that only the users have the access to their accounts and can manage their assets. So, asset management is one of the most practical decentralized finance uses cases to the users.
Complying to AML and CFT Measurements through KYT Mechanism
Traditional financial systems focus heavily on Know-Your-Customer (KYC) protocols. KYC guidelines are its biggest compliance tool for implementing Anti-Money Laundering (AML) and Countering-the-Financing-of-Terrorism (CFT) measurements.
However, KYC guidelines often contradict the privacy efforts of DeFi. DeFi answers this issue with a newer concept called — Know-Your-Transaction (KYT) mechanism. This mechanism suggests that the decentralized infrastructure would focus on transaction behaviors digital addresses rather than the identity of the users.
So, KYT solves two issues at the same time — monitoring the real-time behavior of the transactions and ensuring the privacy of the users. This makes KYT one of the major scopes for decentralized finance use cases.
Read More: What is DeFi?
Decentralized Autonomous Organizations or DAOs
The DAOs are the counterpart of centralized financial organizations in DeFi — making it one of the pillars of decentralized finance use cases.
In the traditional system, centralized financial organizations play a massive role. These organizations serve as administrative entities that manage the core financial operations, such as — fundraising, managing assets, implementing governance, etc.
The Ethereum blockchain ecosystem introduced decentralized organizations to serve the same goals. However, DAOs are by nature decentralized and don’t adhere to the boundaries imposed by central governments or authorities.
Analytics and Risk Management Tools
Transparency and decentralization paved the way to discover and analyze an unprecedented amount of data for the users. With access to these data, users can make well-informed business decisions, discover new financial opportunities, and adopt better risk management tactics.
A new breed of data analytics with useful blockchain tools and dashboards has emerged from this industry trend. DeFi projects like DeFi Pulse or CoDeFi Data are bringing an impressive amount of value with analytics and risk management tool.
Now, businesses have become more agile as they are enjoying unforeseen competitive advantages. This is surely one of the more impacting decentralized finance use cases.
Derivatives and Synthetic Assets
Smart contracts allow the creation of tokenized derivatives and it has become one of the most unique DeFi use cases. Tokenizing a derivative means setting the value of a contract based on an underlying financial asset or a set of assets. This underlying financial asset works like a traditional security, meaning it could include — bonds, fiat currencies, commodities, market indexes, interest rates, or stock prices.
Now, tokenization of derivatives is secondary securities, and their value changes with the value of the primary securities (bonds or fiat currencies). Thus, derivatives are essentially creating synthetic assets.
Synthetix and dYdX are some of the leading DeFi projects focused on tokenized derivatives.
The Network Effect of Infrastructure Tooling
In the DeFi ecosystem, the components within a system can connect and interoperate. This design feature is known as composability and acts as a core infrastructure development protocol. As a result, DeFi projects are continuously integrated through a network effect.
The infrastructure tools are notable DeFi use cases. Different DeFi projects, such as — TruffleSuite or InfuraAPI, are good examples in this case.
Improved Digital Identity
Blockchain-based digital identity systems are already getting much traction in recent times. Pairing DeFi protocols with these identity systems could help people access the global economic system.
The traditional approach prizes one’s income or accumulated asset as the nominators for creditworthiness. With DeFi-paired digital identity, it’s possible to consider the other practical attributes, such as — financial activities or professional prowess.
This new type of digital identity could help the underprivileged to access the DeFi applications from anywhere with an internet connection. It could surely be one of the potential use cases.
Insurance is one of the major financial industries and has already proven to be one of the major DeFi use cases. The current insurance system is bottlenecked with an abundance of paperwork, age-old audit systems, and bureaucratic insurance claiming procedures.
With the successful implementation of smart contracts, all of these issues with the current system could be solved.
Many DeFi projects (Nexus Mutual, Opyn, and VouchForMe) are even offering blockchain for insurance coverage against DeFi or smart contract risks.
P2P Borrowing and Lending
As DeFi is saying goodbye to the traditional banking systems, a vacuum for the borrowing and lending market has emerged. So, borrowing and lending protocol is one of the vital DeFi use cases.
However, the DeFi ecosystem is more suitable for peer-to-peer (P2P) borrowing and lending efforts. Multiple DeFi projects have already entered the market focusing on this particular use case. Among these projects, Compound and PoolTogether are two well-known names. These projects have autonomous interest-based protocols for borrowing and lending assets.
One of the core drivers for DeFi was serving the unbanked or underbanked from the get-go. The inherent traits of DeFi make it well-suited for solving the issues of the current global payment systems. DeFi offers faster, safer, and more transparent solutions compared to legacy systems.
As DeFi drops down the need for middlemen, making payments simpler and more transparent, the DeFi-based blockchain in payment solutions could become appealing to the unbanked population.
Gaming and eSports
Long gone are the days, when video games were nothing but a form of entertainment. Most of the new video games have in-app purchases and loot box features in them. These features enable users to use real-life currency to buy new skins for their characters and tools.
With the use of DeFi, game developers can implement the newer incentive or reward models with DeFi coins. In fact, gaming and eSports will likely become one of the major markets as the users are more tech-savvy and open to newer technologies.
Margin trading is a common feature of the traditional trading system. In simpler terms, it refers to the act of borrowing money from the brokers to invest and gain short-term gain.
With the use of DeFi, traders don’t need to rely on brokers to borrow. Instead, they could smart contracts to enforce decentralized and non-custodial lending protocols. DeFi projects, such as Compound and dYdX have already implemented such lending blockchain protocols. Some are referring to this practice as — the autonomous money markets.
Despite the stigma around the concept, prediction platforms and the market are very large and attract many users. The rise and use of DeFi, has created an opportunity to develop DeFi-based prediction platforms where users could trade value by forecasting or predicting the outcome of future events. These prediction platforms are peer-to-peer, decentralized, and offer global access.
Augur is one of the leaders in the DeFi ecosystem that specialize in the prediction market. This platform allows the users to place bets on events like — sports, world events, economics, election results, and more.
Due to the high inflation rate of fiat currencies and the low-interest rates, saving money has become a challenge in the current economy. In fact, the risk-averse middle-class citizens around the world are desperately seeking alternate investment/savings solutions.
Different decentralized finance (DeFi) projects have taken the opportunity to introduce new solutions. Projects like PoolTogether, Dharma, or Argent are showing promises with their no-loss savings ideology.
Asset tokenization is one of the core features of the DeFi ecosystem. Tokenization is the process of — creating, issuing, and managing digital assets on a blockchain network. As any kind of asset could be tokenized and stored on a blockchain, it is essentially creating a new form of economy.
For example, the NFTs are tokenizing unique digital assets that hold value based on the rarity and the demand for any particular digital asset. A plethora of decentralized finance projects are working on tokenizing digital assets for creating, storing, or trading value.
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