Blockchain technology continues to gain traction in both the private and the professional financial markets. Nowadays, one of the essential concepts in the blockchain environment is DeFi, which comes from Decentralized Finance. This
term is used for all the financial services that are not regulated by a central authority. For instance, estimates predict that the financial industry will reach $26 trillion by
2022, with DeFi contributing well over $142 billion to that number based on its
current worth. With such numbers and predictions, one may wonder how
decentralized finance will revolutionize the financial world more. Read on to find out!
An increasingly thriving market
Numbers are expected to increase substantially by 2022 because of how Defi transactions are conducted. Because Defi seeks to eliminate the centralized financial institution dependency. Individuals who have had hardships gaining loans and conducting other financial transactions now may have an alternative where traditional restrictions won't be a problem anymore. This is because of the peer-to-peer nature, where protocols developed on decentralized blockchain networks do not require access rights for easy lending, borrowing, or trading of financial tools.
A securer means of financing
Now, it is essential to talk about the most relevant DeFi applications. In this case, the most relevant are:
Decentralized exchanges (DEXs): Online exchanges help users exchange currencies for other currencies, for example, change UST to ether, or in any case, the currency or token that you need. DEX is also structured in such a way as to eliminate market manipulations, wash trading, and p2p lending manipulation.
Stablecoins: is a type of cryptocurrency that attempts to offer price stability by being backed or supported by a reserve asset. For example, support by the US dollar.
Lending platforms: Through these platforms, users can access loans and lend their money, obtaining reasonable rates of return. It is important to mention that most cryptocurrency loans are backed by collateral. Thanks to smart contracts, the execution of loans is efficient and 100% secure.
More versatility in financial trading
Current trends in lending pose a strenuous process for lenders and clients. Credit scores, KYC, underwriters, loan officers, and more are part of the process. When the client is approved for a loan, they are usually required to put a large cash deposit down to secure the loan with the intermediary. Even though in most decentralized loan platforms, a collateral is requested to support the lending, much of the paperwork and traditional requirements are nullified. In a time where the global economy is struggling, having to go through such loopholes for borrowing and lending is unacceptable.
Defi takes away the intermediary and provides more versatility to financial trading. First, the defi allows for international trades without going through the transfer processes that centralized exchanges require. Second, as Defi is peer-to-peer based, trading can be done without central authorities. Finally, one of the most relevant characteristics, and that is a strength, is that the average interests for acquiring a loan are much lower than if you acquired a loan through a centralized financial service.
Critical situations where Defi takes advantage
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Permissionless Operations: Thanks to smart contracts, operations in the decentralized finance ecosystem are autonomous if the conditions of both parties are met. This means that there are not as many waiting times in authorizations as there are in traditional finance
- Accessibility: the processes are much more accessible thanks to the reduction of operational processes for the execution of financial services. Thanks to this, more attractive interest rates can be offered to lenders and borrowers.
- Transparency: As these financial services are not regulated by a central authority, many frauds related to corruption or preferences are avoided that may exist in the case of centralized finance. Thanks to the attributes of the blockchain network, transparency is one of the most relevant advantages of Defi.
- Human error and mismanagement: Thanks to the automation of processes, errors are cancelled, and fraud cases have a lesser chance of appearing in the middle of the procedures
Conclusion
With the increase in popularity and great achievements of decentralized finance, its use becomes more and more common. It is now that challenges arise for both parties. On the one hand, for the DeFi environment, there are many latent challenges linked to scalability and operability to provide an efficient and usable service for its users. On the other hand, for the traditional financial market, there is latent concern about what actions they should take to avoid becoming irrelevant and here the phrase applies, if you cannot beat them, join them. And you, are you already part of decentralized finance?
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