DeFi (decentralized finance) is now entering an exciting period of development where its real use cases are being more acknowledged, adopted, and scaled for more users after an initial experimentation phase led by early adopters. Now, DeFi is much more well-known in the blockchain community and starting to be discussed in traditional financial circles.
The task of identifying these real DeFi use cases can be a daunting one as DeFi has been characterized as being very innovative and fast-paced with several projects having launched on different decentralized blockchain networks.
In this blog, we’ll go over five of the most promising use cases for DeFi and explain their potential benefits for users.
1- Stablecoins
At first, stablecoins (digital tokens backed 1:1 by a fiat currency) may seem to not be part of DeFi, yet they are at the core of the space. It is an asset class that can be used for immediate payments, cross-border remittances, a haven from volatility, a long-term store of value, and more, which holds immense value for individual users, enterprises, and organizations.
The stablecoin is also a complex asset. How it maintains its peg to a regularly accepted currency is crucial for its proper functioning. There are three ways to do this:
- A fiat-backed account
- An algorithmic peg
- Collateralized debt positions
Each type of stablecoin has its place in the DeFi ecosystem of a network. All are needed for the growth of DeFi.
Read more: What’s the difference between CeFi and DeFi?
In the developing world, they also are playing a pivotal role. In many regions, inflation is causing economic distress, and certain governments are implementing capital controls to prevent citizens from buying US dollars which are deemed to be more “stable”. In these regions, stablecoins are providing an alternative way for these people to protect themselves from their currency devaluation and engage in economic activity through an internet connection.
2 – Cross-border remittances and settlements
Sometimes overlooked, the quick settlement of cross-border transactions is a significant problem worldwide. Networks such as SWIFT are built using outdated technology and are slow and expensive to use. Financial institutions are open to looking for cheaper options that are also more efficient.
The decentralized nature of blockchain and its programmable smart contracts are perfect for this type of problem. They can settle transactions between financial institutions or multiple parties across all types of physical borders without any intermediaries. Transactions can be bundled or even programmed to autonomously self-execute if certain conditions are met with complete transparency and accountability.
Using DeFi products & services built on top of decentralized blockchain technology, global cross-border payments can be instantaneous with immediate settlement, and lower fees.
3 – Synthetic assets
Not everyone has access to global financial markets, which are located in a few centralized locations in the developed world. This can pose a drawback to certain people who are unable to access services based on such traditional financial markets. The blockchain and DeFi have a solution called synthetic assets.
Commodities, stocks, gold, oil, national currencies, and other traditional assets have the potential to be digitally represented on a decentralized blockchain and can be made to mirror the behavior of the original asset. These synthetic assets can give market access to anyone around the world to markets that would be close to them.
Many markets can be simulated using cryptocurrencies and made to track the underlying asset. This has created a new type of market where people can get exposure to gold, oil, soybeans, and other types of commodities without having to own the asset itself while benefiting from the unique value proposition of crypto-based DeFi products and services such as fractional ownership, fast settlement, open access, and more.
4 – Borrowing and lending marketplaces
Another type of DeFi product is borrowing and lending marketplaces. Here, loans are permissionless meaning that any person that meets collateral requirements can immediately get a loan and use it for other purposes. Access to such services is decentralized and more accessible than having to go through a centralized financial institution.
These lending marketplaces can be used by traders and others looking for yield and those looking for more accessible credit. There is still a way to go to raise awareness and drive more adoption of these services, but the idea is gaining more traction as time passes and developers are consistently working to improve these services.
These kinds of marketplaces can hold appeal for those lacking access to basic financial services for various reasons such as poor credit or a lack of credit history, bank account, etc.
5 – Real-world asset tokenization
Markets in the real world are difficult to make global or have them attract liquidity at the very beginning. This is especially so in developing countries, but DeFi is a potential solution with the ability to tokenize assets.
Tokenization means taking the characteristics of a real-world asset and creating a digital representation of it that is recorded on a decentralized blockchain. The difference with synthetic assets is that the underlying asset is not needed in the former, while in the latter, the original asset is incorporated into the ledger.
This creates an immediate global market for the tokenized item and also access to liquidity via the blockchain network. Almost anything can be tokenized, including real estate property, intellectual property such as artwork and music, and shares of bonds. Since these are digitally recorded and maintained, ownership and transactions can be fractionalized and traded globally with fast settlement.
Read more: EMURGO presents in front of Wyoming Stable Token Commission
EMURGO and the Institute of Blockchain Singapore are teaming up to offer a special 2-day workshop on DeFi to businesses and professionals in Singapore.
This 2-day DeFi workshop aims to provide a well-rounded understanding of both blockchain and DeFi (decentralized finance), enabling attendees to make informed decisions, participate in the DeFi ecosystem, and contribute to the growth of this innovative financial space. Speakers include those from the biggest names in the industry including EMURGO, EMURGO Academy, Coinbase, and more.
Early bird registration offers a 25% discount, available until December 15, 2023.
For more workshop information, please visit the registration page here.
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Disclaimer
You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by EMURGO to invest.
