We have been, for a considerable stretch of time, conditioned to believe that anything to do with finance will have to involve centralized entities like centralized banks and government regulations. However, the distributed ledger technology called the blockchain is facilitating an entirely new realm of finance called decentralized finance, commonly abbreviated as DeFi. DeFi, as the name implies, does not have to be under the control of any centralized body.
DeFi is a network of different applications designed to provide different services. All of them are designed to run on top of the blockchain, and they also seamlessly integrate with each other. They provide different financial services like lending and borrowing, banking, and a lot of other services that are integral to traditional finance.
The Advantages of DeFi
DeFi brings to the table a lot of advantages. The first advantage, as the name implies, is the degree of decentralization. Without any centralization, there are no points of failure like hacks and theft. The epicenter of DeFi is a small self-executing program called the smart contract. The smart contracts take care to address all the activities of the DeFi ecosystem without much human intervention… And in most cases, zero human intervention.
The minimization of human errors means that there is very little room for uncertainties and inaccuracies. It also ensures that the entire process is smooth, fast, and automated, in addition to making the system immune to manipulation, enhancing security.
DeFi is global in its reach as it does not depend on any centralized body to authorize and effect the transactions. Since it does not even mandate having a bank account, it becomes extremely easy for even people in the remotest regions to access DeFi and its services.
How Relevant is DeFi in Today’s Finance?
With so many advantages, it is quite apparent that the world is moving towards the DeFi. There are, however, a few stumbling blocks. The first of them is the legal status of blockchain technology and its manifestations.
Jurisdictions all over the world have been having mixed perceptions about blockchain and cryptocurrency. On one side, they intend to regulate anything to do with crypto, and some countries like Malta and Estonia have been successful in doing it. They have preserved the advantages like swift transactions and global reach. However, there has been a heavy compromise in terms of decentralization as it would come under the scrutiny of some regulatory body if it has to be made completely legal.
Some countries like China and Korea have been extremely averse to the idea of cryptocurrency. They do not even intend to accept it in the near future, although a lot of businesses have been springing up in these countries. Countries like India have not validated crypto as a method of payment, but cryptocurrency exchanges are valid financial businesses.
Countries like the USA are still in the process of exploring the extent of regulation by the SEC.
The Different Business Possibilities
This does not, however, mean that there are no business opportunities. It is to be remembered that if a new financial ecosystem has to replace an existing one, it needs to at least provide all the services that traditional finance provides, if not more! There are a lot of business opportunities within the DeFi realm, and let us look at a few of them.
- DeFI Lending & Borrowing
Most people approach traditional banks for loans for different purposes. With DeFi, lending and borrowing are made possible through suitable platforms. The Compound is one such platform that provides these services. People can borrow cryptocurrency and other digital blockchain assets without the intervention of a third-party. This means that the interest rates are relatively low, and the processing is almost immediate. People can submit crypto collaterals to avail of these loans. More often than not, people who borrow from these platforms are required to submit collaterals that are worth more than the money they’re borrowing. This is called over-collateralization. It might not make business sense, but some people, in an endeavor not to sell their crypto assets and to use certain coins for short-term profit, engage in DeFi lending and borrowing.
The most common use of money these days is making payments. The payment process, however, has different tax implications, and it is quite expensive if money needs to be sent across or paid for across borders. There are considerable chances that the money might get lost and eventually become irretrievable. With DeFi, you can easily make payments from Wall Street to Wolleka almost immediately. This presents a lucrative case for business people doing international business. With the immediate clearance of payments, they can now consider establishing clientele in almost any city or any country that has a good Internet connection.
- DeFI Exchanges
Cryptocurrency exchanges have been looked at as the most practical manifestation of the blockchain to technology. It brought cryptocurrency from the confines of technology exponents to common investors. If DeFi has to take strong roots, it needs to address this section.
It has been effectively taken care of by decentralized exchanges. A decentralized exchange does not require any centralized body, and the entire process is carried out on a peer-to-peer basis. Instead of matching a buying order and a selling order, a DeFi exchange matches the buyer and the seller. Therefore, the exchange does not, at any point in time, have control over the funds of the user.
The people who wish to engage in the transaction can now place the crypto funds on a smart contract escrow. Once the smart contract confirms the deposit of money from both parties, it releases the amounts to both the exchanging parties. The only fee that people will incur when they transact with each other is the gas fee for the effecting of the exchange. A DeFi exchange has no point of failure, and it will continue to function even if there are no proper founders or offices.
- DeFI Insurance
Insurance is capital intensive, especially when it comes to commercial insurance. There are a lot of intermediaries involved in the current insurance ecosystem. With DeFi, it becomes possible for insurance to become cheaper.
Since everything is recorded over the blockchain and the process is automated by a smart contract, the insurance premium is relatively low, making a huge difference for people and organizations that insure commercial buildings, ships, and oil rigs.
- Smart Contract-Based Revenue Solutions
The current financial ecosystem facilitates earnings by investments. In the same way, there are certain ways to earn money in your DeFi ecosystem as well. Some of them include yield farming and liquidity pools. By depositing crypto coins/assets in a repository gated by smart contracts, users can create a crypto granary similar to banks for other people to borrow from. Based on the borrowing, they can earn interest. This has been a leading revenue-generating method for crypto investors.
There is no question on the fact that DeFi is all set to be the financial system of the future. If you are one of those aspiring entrepreneurs who would like to get a headstart in this new realm of finance, all you need to do is get in touch with a blockchain development company that specializes in DeFi development. Their expertise in DeFi technology and then familiarity with DeFi-based business models will ensure that you get all your DeFi services and solutions in place.