Decentralized finance is the topic on everyone's mind regarding the next big application of cryptocurrencies. Now, when cryptocurrencies are widely accepted and have a large user base, decentralized finance is on the rise, and new uses are found all the time.
There are many benefits of decentralized finance for the everyday user. This approach to finance is less costly, there are fewer fees to cover, it's faster and better managed, and investors have more privacy. This article will outline some of the most important users of DeFi, but many more will become prominent in the years to come.
What is Decentralized Finance (DeFi)
Crypto decentralized finance (Crypto DeFi) is a set of financial services and applications that rely on blockchain technology. It’s done without the burden of centralized structures.
The transactions made this way don't require a third party. They are faster, less expensive, and easier to manage than those made with traditional banks, markets, and brokerages.
How is Decentralized Finance Used?
There are many uses for decentralized finance, and new ones are emerging regularly as there are more users and the technology improves. Most of the uses mimic the features of traditional and centralized finance. Others are unique to DeFi and depend on blockchain technology in particular.
Asset Management
One of the features in which DeFi is better for the end user is the control over asset management. Asset management includes purchasing, selling, and transferring digital assets. All of these combined allow investors to earn interest on their assets easily.
In contrast to using traditional financial institutions, using DeFi allows the investors to do so while keeping the data private online and while remaining anonymous in most cases. This is an increasingly important feature now when so much of our online activity is recorded online. Asset management was the first decentralized finance feature that took off and found a base of users.
Complying with the Regulations
Traditional banking systems use protocols known as "Know Your Customer." These require the customer to identify themselves using a photo ID when signing up for a service. It's a part of larger efforts to stop money laundering online.
DeFi provides a way to go around this by offering their users both compliance with the regulations and the online anonymity they are after. The protocol that accomplishes this is known as "Know Your Transaction." That way, each transaction can be tracked, but the users don't need to reveal their identity.
Decentralized Autonomous Organizations (DAOs)
Decentralized Autonomous Organizations (DAOs) are the DeFi counterpart to the centralized institutions used in traditional finance. These organizations function as administrative bodies that oversee basic financial operations. It includes fundraising, asset management, and governance implementation.
The institutions such as these are the basis of traditional finance. The goal of DAOs is to provide the same services and the same level of security without the overreach that comes with using centralized banks and finance institutions.
Data Analysis
The transparency and decentralization essential to using DeFi also come with many additional features that the users can take advantage of. It provides the users with a much more robust data set. These are gathered from countless decentralized transactions. Analyzing this data can help the users make predictions and find patterns.
The blockchain tools are then used to analyze the data (similarly done as with stocks), creating a whole new industry of data analysis that's tech-driven and more accurate. It's one of the most important uses of DeFi in the long run, as it feeds on its own data and provides verifiable results.
Derivatives
Derivatives are financial instruments whose value is derived from the value of an underlying asset, index, rate, or benchmark. Decentralized finance allows for derivatives to be tokenized. The value of a token fluctuates based on the value of the underlying asset. This means that the derivatives are synthetic assets.
Investors should be aware that a derivative has an underlying asset. It can often be a fiat currency; this is a deal breaker for some investors as central banks control fiat currencies.
Infrastructure Tooling
One of the best qualities of decentralized finance comes from the fact that different system components can readily connect and communicate with one another. These tools enhance efficiency, scalability, and consistency in managing complex infrastructure setups. Using decentralized finance in this manner achieves faster development cycles and reduces manual errors.
Smart contracts that are created in this way have many practical applications for users. They allow complex contracts to be executed automatically. It makes sure that all parties in a contract follow through with their obligations. Infrastructure tooling can also be used to create decentralized financial exchanges. Such exchanges are starting to play a more significant role in DeFi.
Using DeFi Protocols to Create a Digital Identity
Users of decentralized finance want to remain anonymous online but also to be able to control and confirm the transactions they make. This can be accomplished by creating an online identity, often referred to as an online avatar.
Users can create and manage their identities on a blockchain, giving them control over their personal information and reducing reliance on centralized identity providers. This was never the initial idea behind decentralized finance, but it emerged based on the needs and interests of the users. It goes to show how versatile and innovative this technology can be.
Insurance
Insurance is a huge industry worth billions of dollars. The main principle behind this industry is the ability to predict the events' outcome and determine the chance of a specific outcome. Decentralized finance and blockchain technology can significantly make this a more scientific venture than ever before.
Smart contracts can also be used to automate the different variables usually included in the insurance business. They will allow the parties to adapt their predictions in real-time as new events emerge and change the circumstances of a contract.
Prediction Market
The prediction market is one of the broadest fields in which decentralized finance can be used. Countless industries and financial services require predicting future events based on a set of data. Harnessing the wisdom of a crowd of users is essential to such an endeavor. Decentralized finance provides the data needed for it.
Tools already use this principle for online gambling and sports betting. However, more serious uses, such as stock markets and the insurance industry, are also available. This isn't to say that the predictions will be perfect in the years to come, but that was never the objective for the industry.
To Sum Up
Decentralized finance uses blockchain technology to provide the services of a traditional finance industry. It does so without using centralized institutions. This provides a better service than the traditional alternative and has many additional important features for investors and users.
DeFi is already used in the prediction markets, the insurance industry, and infrastructure tooling to create derivatives. DeFi can also be used to create a digital identity and comply with the regulations without jeopardizing the privacy of those who use it. All of this is to say that DeFi will continue to be the future of the industry. It will have many more new features and uses, making it a preferable alternative to traditional finance.
