DeFi use cases: Paving the way to a new financial world
Powered by cryptocurrencies, Decentralized Finance (DeFi) is a peer-to-peer financial service that works on a blockchain platform with little or no intermediaries. It was designed to offer an alternative solution to traditional, middleman-focused financial systems with its reliance on banks, brokerages and other financial institutions. DeFi uses smart contract technology that requires zero human intervention and offers solutions that eliminate tedious system buffers, bring transparency and improve transaction speed and cost, paving the way to a new financial world.
Asset Management DeFi allows users to enjoy greater control of their own assets by enabling them to buy, sell, and transfer digital assets. Those using DeFi platforms are assured complete confidentiality unlike traditional financial systems which require data to be shared with financial institutions for accounting purposes. The use of private, digital keys and passwords on DeFi platforms ensure complete confidentiality for transactions.
P2P Borrowing and Lending Using DeFi, buyers, sellers, lenders, and borrowers can communicate peer to peer (P2P) instead of through intermediary institutions when borrowing and lending; and since almost all DeFi projects are open source, there is complete transparency as users can check and audit transactions. Insurance Claims Current insurance systems lack efficiency and have multiple bottlenecks due to an abundance of paperwork, legacy audit systems and bureaucratic procedures. The use of smart contracts significantly improves the efficiency of insurance systems. Users get a sense of security through DeFi projects like Nexus Mutual, Opyn and VouchForMe that offer insurance coverage for cryptocurrency on the blockchain network. Digital Identity Block-chain based identity systems are being paired with DeFi protocols to enable users to access the global economy. Traditionally, income or accumulated assets were the parameters used to assess credit worthiness. Now, with DeFi paired digital identities, it is possible to assess and evaluate other financial attributes too, to ensure financial stability.
These transactions however, are not without a certain element of risk. Firstly, the Ethereum based blockchain infrastructure is susceptible to digital attacks and network congestions that can lead to failed transactions, liquidation issues and loss.
Secondly, there are currently no globally accepted regulations in place and there are arguments, both for and against self-regulation. Given that DeFi has the potential to revolutionize traditional financial systems and institutions, ensuring that standard guidelines are in place will clearly be critical going forward.
This article written by Fatmi Shahzad, CEO of SettleMint India
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