Although many individuals are skeptical about cryptocurrencies, blockchain usage in specific organizations and processes has earned widespread acceptability. Decentralized finance is one of the blockchain attributes that has garnered the most attention (DeFi).
All areas of the financial industry have steadily increased their use of Ethereum and the Dapps (DeFi apps) that are already accessible to build one or more financial applications, although DeFi adoption has not yet reached the stratospheric levels anticipated for 2019.
New possibilities for small and medium-sized businesses
DeFi has reduced many barriers preventing SMEs and startups from entering the market. Still, most banks are mired in large, cumbersome legacy systems that make conversion impossible.
Although many businesses view this as a risk, many major banks have the foresight to build incubators and accelerators to expedite the development of their blockchain solutions.
Choosing an appropriate market-gap-filling solution is the first obstacle to entering the DeFi cosmos.
As a result of the capabilities of decentralized ledgers, various use cases, ranging from traditional financial models like payments to novel instruments like tokenization and stablecoins, have evolved (tokens linked to a fiat currency, such as dollars). Consider some of the possible application scenarios.
P2P Transactions and Payments
Banks and other trustworthy intermediaries are no longer required due to distributed ledger technology (DLT). DeFi Smart contract development replace the approvals and procedures of traditional players. Electronic commerce refers to the selling of electronic products.
Although it cannot presently match the high speed of conventional financial platforms due to the mechanics of certifying a transaction’s validity, it may speed up the transaction.
While most individuals still use fiat accounts, there is a shift toward peer-to-peer payments utilizing cryptocurrencies, particularly for cross-border transactions where the prices and duration of money transfers are disadvantageous for both the sender and the recipient.
Increasing numbers of conventional merchants are accepting the leading cryptocurrencies.
People without bank accounts could access financial services if they could conduct transactions without a mediator. More current estimates of the global number of unbanked persons are unavailable, while the World Bank pegged the figure in 2017 at 1,7 billion.
This is mostly since the vast majority of these people (more than 1 billion) lack identity, preventing them from accessing health and educational facilities and opening a bank account.
As stated previously, every individual requires a unique identity. Using a digital ID instead of more conventional methods of issuing identity cards or physical passports is the quickest way to give identification to everyone. Digital identification is thus a vital component of DeFi.
The ID2020 Alliance, which promotes and verifies digital identification activities, has been established, and blockchain is being utilized to produce solutions. To achieve the Sustainable Development Goals Target 16.9, however, additional innovation in this field is required.
Among the most famous DeFi use cases is the creation of marketplaces that connect buyers and vendors. These markets rely on smart contracts to enable direct transactions without intermediaries or brokers.
The spectrum is expansive, ranging from locally focused, community-based markets that offer minimal benefits for local consumer purchases to marketplaces that provide sellers access to international markets without having to pay brokerage fees to companies like Amazon and eBay.
Moreover, there are niche markets for investors and collectors, especially in the art industry.
The Data and Energy Market
Energy and data might be considered merely another currency, but their importance in powering mobile and other devices is growing. Electroneum is a market leader due to its ability to provide top-up options via an app supported by a DeFi infrastructure.
In addition to peer-to-peer energy trading, clients can sell excess capacity to the grid. Recognizing the need for a carbon-neutral planet, providers in this market frequently prioritize renewable energy. This marketplace is called “DeEn” (Decentralized Energy).
Lending and Borrowing
Historically, financial markets have made money by charging savers and investors different interest rates than borrowers. Many applicants are unable to acquire loans because of strict credit requirements, or they are required to submit collateral guarantees.
DLT enables borrowers who would not qualify for a typical financial institution loan to obtain funds directly from one or more investors through a smart contract that specifies and manages the loan.
Other models, such as BlockFi, can lend fiat currency in exchange for cryptocurrency collateral and pay interest. The Covid-19 epidemic has expedited the expansion of this DeFi domain.
This is a fractional sum. Most potential investors need help to purchase a single Bitcoin at its current price of approximately $23,000. A 100 millionth of a Bitcoin, or a few Satoshis, can be purchased by anyone.
The token’s appearance and function can be altered following market demands.
An initial coin offering is a strategy for attracting conventional lenders and markets (ICO).
Among the problems that cryptocurrencies continue to confront is market volatility.
Understanding the Dangers of Smart Contract
Determining whether or not a person is accountable for their acts is the definition of “responsibility.” DeFi is an excellent chance to introduce a new financial product rapidly, but it is crucial to fully comprehend the risks associated with smart contracts.
- Incorrect contract structuring due to bad code and requirements.
- Inadequate cybersecurity measures to avoid hacking
- Changes in the law
- Since numerous governments are currently determining the regulations governing the cryptocurrency industry, changes to the contract form are possible.
- Inefficient contract administration increases unnecessary costs. Ethereum is one of many platforms that offer DeFi, but it holds 80% of the market.
- When a smart contract is executed, “gas,” must be purchased, is consumed. This could have unintended financial repercussions, rendering the DeFi program unproductive and unattractive to prospective clients.
Most organizations that have previously deployed blockchain technology are aware of the necessity for audits of smart contracts to mitigate these possible hazards. Professional smart contract auditors enable the optimization of smart contracts and the identification of risks and anomalies in the smart contract code.