What is Decentralized Finance(DeFi)?

Part 2: Where to Use

DONGGYU LEE

 

[ How DeFi is used ]

1) Loans and rentals

  The open lending protocol is the most popular type of application in the DeFi ecosystem. Open and decentralized lending system have many advantages over traditional credit systems. This enables instant transaction execution, digital assets can be collateralized, and no credit checks are required. Because these loan services are built on top of a public blockchain, they require minimal trust and are guaranteed by cryptographic verification methods. The lending market on the blockchain reduces the risk of the parties to the transaction and makes lending and lending services available to more people faster and cheaper.

2) Currency banking service

  DeFi applications are by definition financial applications, and currency banking services are one obvious use case. This includes Stable Coin issuance, collateralized loans, insurance, etc. As the blockchain industry matures, attention is focused on the creation of stable coins. Although this is a cryptographic asset linked to real assets, it can be transmitted digitally with relative ease. In order to get a secured loan from the existing financial sector, it takes a lot of time and fees because of the financial intermediary. By introducing smart contracts into the process of such secured loans, collateral and legal fees can be significantly reduced. Insurance on the blockchain can eliminate intermediaries and spread risk among many participants. This maintains the same service quality and can lower insurance premiums.

3) Decentralized Market

  Some of the most important DeFi applications are undoubtedly decentralized exchanges (DEXs). The platform allows users to trade digital assets without a trusted intermediary (exchange) to hold the asset. Transactions are made directly between user wallets thanks to smart contracts. Decentralized exchanges generally have lower fees than centralized exchanges, as there are much fewer maintenance costs involved. In addition, blockchain technology can be used to issue and allow ownership of traditional financial instruments in various fields. For example, a security token issuance platform can provide tools and resources for issuers who issue tokenized securities on a blockchain to specify specifics.

Image Source: IndustryWired

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