DeFi is taking over the conventional means of making payments. It is a substantial segment of the blockchain mechanism. The dawn of DeFi has revolutionalized the whole finance sector. It has introduced new ways of transactions through crypto payments. Moreover, finance operations like synthetic assets have also come into the limelight because of DeFi.
Let's understand DeFi with its use cases.
DeFi stands for Decentralized Finance. It is a type of finance that helps make money transactions by incorporating blockchain technology. Hence, it has revolutionised and transformed existing payment systems. It aims to remove the presence of a middleman or a broker in the transactions. Mostly this happens in conventional forms of transactions. In such money transfers, the government, bank, or exchanges work as middlemen. They monitor and execute the transaction and have specific authority over it. This takes away massive control of the transaction from the hands of the sender and receiver of the money. Therefore, DeFi is the opposite of a centralized form of money transfer.
The 1st generation blockchain associated with cryptocurrency provides several new prospects for financial structures. For example, there can be a possibility of building never-seen-before third-party authorities with the help of crypto payments. The third-party will execute the role of validating or verification agent. The DeFi came into the market initially by Ethereum. Since then, other cryptocurrencies are also incorporating it into their payment system.
Now let's come to the central part, which is to discuss the most about use cases of DeFi. These use cases also represent how DeFi can benefit the overall financial system of the world. It can help demolish the existing lacks in the system and increase efficiency.
The most crucial use case of DeFi is that people can better control their assets. They can experience better management authority on their assets, which is impossible in everyday currency transactions and conventional payment system. As evidence, several latest DeFi projects focus on functions like purchasing, selling, or moving assets. This also happens in digitalized form. This also helps in garnering interest from the digital assets.
Opposite the conventional transaction mechanism, people also get complete anonymity with DeFi or crypto payments. This helps in keeping their essential information safe. DeFi is also offering an encrypted transaction facility. You can check out new DeFi projects like Metamask, Gnosis Safe, etc. All these refer to better information safety. They are focused on allowing the users to store their information only on their devices without any involvement from a third party.
The conventional finance system intensively incorporates KYC norms. KYC stands for Know-Your-Customer, which helps traditional financial systems in two ways;
But the privacy aspect gets a second seat in the KYC protocols. However, the DeFi has started incorporating another mechanism called Know-Your-Transaction. This helps manage the decentralized network by emphasizing the digital address behavior. It doesn't focus on the identity of the customer. Instead, it focuses on the behavior of the transaction. This helps resolve the issue of privacy for the customers and the issue of administrating the transaction.
Centralized management organizations are very crucial in conventional financing transactions. This is because such organizations bear the responsibility of executing financial operations. However, with decentralized organizations of the Ethereum blockchain, people can enjoy the same facilities. Only it will be decentralized and without any restrictions.
The clarified transactions and crypto payments brought a new level of transparency. The decentralized management was responsible for this. Industries and businesses can utilize this data and access information to execute better financial decisions. In addition, it helps in better risk management and analysis, just like CoDeFi or DeFi Pulse.
The building of blockchain utilizing derivatives is a very prominent feature of DeFi. These intelligent contracts focus on the valuation of an asset and not on the valuation of the contract. It also involves conventional securities and other derivatives like fiat money, market indices, etc.
The tokenized derivatives experience fluctuations if we compare them to original assets. However, they have become additional securities.
You can try different interlinking between the components of DeFi system. For example, the development protocol of crypto payments focuses on composability. You can see several infrastructural tools which have used DeFi like TruffleSuite, InfuraAPI, etc. The network effect of DeFi has merged several of its new projects.
VPI stands for Virtual Persona Identification. This is the feature of digital identity by using the blockchain method. People can incorporate these with the fundamental applications of DeFi to get more benefits. Typically, the credit rating of people is done by evaluating their wealth. However, adding other aspects like technical skills can also be used. VPI allows such identification.
With DeFi, the insurance industry can enhance its operation. For example, they can make it more accessible without long documentation processes or administrative work. The incorporation of smart contracts can solve several such issues.
In its early phase, gaming wasn't considered very serious. However, now the whole industry has become a tremendous financial entity of the global economy. It also utilizes several types of transactions with great volume numbers. Enabling DeFi in such operations will make the process faster and much more streamlined for the youth.
Margin trading makes up a considerable portion of traditional trading. Business people take loans and then invest them to earn profit. But with DeFi, investors can eradicate the presence of an intermediary to get a loan. Implementing intelligent contracts through crypto payments can reduce the need for third-party management. This can enhance the growth of the independent money market.
The whole finance sector is experiencing a shift in its regular functions and the payment system with the rise of DeFi. So it's the right time for investors, people in business, and even everyday people to start figuring out the latest ways of managing finance. And DeFi offers one of the best alternatives for it.
