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Tuesday, October 26, 2021

How DeFi is making a big difference in the financial industry

Investment in cryptocurrencies has increased worldwide in recent years. Simultaneously, people and companies are exploring possibilities in Decentralized Finance (DeFi).

What is DeFi?

DeFi is based on a peer-to-peer concept that removes middlemen from the system. It replaces Bank, Brokerage and Non-Banking Financial Company (NBFC). DeFi uses smart contract technology on a blockchain network. There is no manual work, which reduces the chances of mistakes and increases efficiency.

How DeFi Works

The DeFi protocol uses computer code called smart contracts that run on a blockchain network. The source code of most DeFi projects is available and can be checked and audited by anyone. Users of the DeFi protocol can communicate with these smart contracts to transfer funds, borrow or perform any other service using their wallets.

DeFi projects on the blockchain network provide easy and low cost access to capital, lending and decentralized crypto and synthetic stock exchanges. Due to the decentralization, some DeFi projects like Uniswap have increased their use in the financial market. In addition, DeFi allows for more efficient financial services at a lower cost by eliminating middlemen.

Being on a blockchain network and generally open source, anyone with an internet connection can view and audit the source code as well as view all transactions. Once any information enters the blockchain network, it cannot be changed. This creates a reliable financial system that is code-dependent. An example of this is the decentralized exchange (DEX).

Growing Popularity of DEXs

The DEX has changed the financial system over the years. With the help of Automated Market Makers technology, DEXs can provide asset-wise liquidity instead of order books on centralized exchanges. Consumers can earn income from this through trading fees.

Unlike centralized exchanges, DeFi companies do not require intermediaries to provide services such as buying, selling and lending crypto. Most of the DeFi projects are built on the Ethereum blockchain network as it has the advantage of entering this segment early. This helps developers to create such decentralized applications (DApps). However, new blockchain networks like Solana, Cardano are also increasing competition in the DeFi segment.

use in the insurance industry

The use of DeFi in the insurance industry has increased. Right now the insurance system is grappling with cumbersome audits, paperwork and bureaucratic claims process. This can be made more effective with smart contracts. DeFi projects such as Nexus Mutual, Opyn and VouchForMe also offer insurance coverage for cryptocurrencies on the blockchain network. With rising inflation and falling interest rates, it has become difficult for people to save and invest. DeFi projects help in saving and investing without risk.

DeFi has replaced traditional banking systems, making lending protocols one of DeFi’s key applications. Many of DeFi projects, such as Compound and PoolTogether, are focused on the peer-to-peer (P2P) borrowing and lending market. Distributed Ledger Technology (DLT) has accelerated transactions. This has especially benefited cross-border transactions where transaction delays and high costs caused problems for both the sender and the receiver.

DLT democratized banks so that everyone can take loans. One can even take a loan by pledging cryptocurrencies. In addition, the DeFi ecosystem facilitates tokenization in which digital assets can be created on the blockchain network. This has created a new economy.

For example, digital assets are being tokenized in the form of NFTs so that they can be stored or traded.
Its growth has been fueled by the adoption of DeFi where consumers can trade by predicting the outcome of future events.

Benefits to the gaming industry

With platforms like Augur, DeFi allows users to place bets on world events. Games and eSports have also emerged as key markets for DeFi technology. Game developers can make in-app purchases using DeFi tokens. Collectibles and trading games are becoming popular on the blockchain. In this, players can trade unique tokens and developers can create their own ecosystem.

These advantages of DeFi illustrate the reasons why its use has increased in recent years. It has achieved a market capitalization of $128 billion.

Although decentralized exchanges offer many benefits, they also come with risks. Unlike traditional banking, there is no insurance on investments on DeFi. Other cryptocurrencies are pledged in DeFi loans. However, if there is a fall, the value of these assets can also fall sharply. Apart from this, if the account information like data or passwords is lost, it can be retrieved from the centralized system.

Consumers can also lose information and funds if they forget the seed phrase while trading on DEXs. Therefore, before making an investment decision, consumers should thoroughly check those applications to ensure that they are secure and fully audited.

To sum up, the centralized system is dominating the market due to its user friendly interface, regulatory oversight and insurance facilities. The growth of DeFi has made room for decentralized crypto exchange protocols.

As more people enter the digital asset space, DeFi will have to expand its capabilities and bring more security when it comes to security.

It started from the time Ethereum 2.0 happened after the Ethereum network upgrade. In the near future, the DEX will certainly try to make cryptocurrency trading more fair, private and free. This will boost the growth of decentralized finance. The latest developments and trends in crypto investing are that they are very optimistic about decentralized exchanges.

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Shehnaz is a Corporate Communications Expert by profession and writer by Passion. She has experience of many years in the same. Her educational background in Mass communication has given her a broad base from which to approach many topics. She enjoys writing about Public relations, Corporate communications, travel, entrepreneurship, insurance, and finance among others.
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