In the cryptocurrency industry, decentralized finance (DeFi) refers to financial services provided by decentralized institutions. The platform offers various financial benefits created by developers that are accessible to anyone. A decentralized organization runs these services, which gives users more control over their funds than centralized alternatives. New non-custodial and decentralized financial services are added to the DeFi sector each week.
Globally, these services are available to anyone. By using smart contracts written into lines of code, the DeFi ecosystem makes access to financial services easier by utilizing publicly distributed networks. Smart contracts and updated trading platform are used in DEX platforms for automating trades and other trading tasks to reduce costs and improve trust.
Purpose of Decentralized Finance (DeFi)
Having learned about Decentralized Finance, the next crucial concern is what it is meant to accomplish. In times when centralized finance is called an unstoppable phenomenon, it makes sense to ask why DeFi came into existence. Therefore, we can better understand the importance of DeFi if we examine the system’s origins.
A centralization factor is evident in traditional markets, as they are influenced by governments and are centralized structurally. As a result, centralized entities such as banks should also be responsible for operating the currency system. As a result of centralized management and regulation, centralized entities have complete control over themselves. Additionally, centralization involves higher risk since there is only one point of failure. Many questions about centralized entities also require alternatives.
Use Cases of DeFi
In conventional centralized financial systems, decentralization was an effective way of dealing with the setbacks described above. Financial systems no longer require the involvement of central authorities, as well as a re-invention of the banking system to provide opportunities to almost everyone. Reflecting on DeFi’s use cases and benefits can help you anticipate the reasons for focusing on DeFi. Here is a detail of the different common DeFi use cases.
Open Lending Platforms
Open lending protocols can be easily implemented thanks to DeFi’s open-source nature. Decentralized finance is made easier to lend through open lending protocols. Digital assets are collateralized, standardized, no credit checks are performed, and instant transactions settle instantly thanks to open lending protocols.
In addition, public blockchains provide reasonable assurances of the functionality of lending services. Decentralized Finance lending services are also more cost-effective than conventional credit systems since they support cryptographic verification methods, limit counterparty risk, and support cryptographic verification methods.
Stablecoins, Insurance, and Mortgages
DeFi for insurance, mortgages, and stablecoins is another promising example of emerging everyday use cases. The use of stablecoins is facilitated by decentralized finance because they are based on fiat money’s value. Through decentralized finance, insurance activities are supported by removing intermediaries and speeding up the process. In addition, smart contracts could be leveraged to enhance the speed and cost of mortgage solutions through Decentralized Finance.
Decentralized Transactions
DeFi’s use cases in a decentralized marketplace provide an opportunity to emphasize what it is. Trading digital assets on decentralized marketplaces or DEX platforms does not require centralized authorities. With centralized marketplaces, digital assets are under absolute control with a single point of failure, and hackers are more likely to exploit them.