Compelling Use Cases of Decentralized Financing (DeFi)

Blockchain technology emerged with the advent of Bitcoin and was restricted to cryptocurrencies for the first few years. However, the technology has transcended crypto and is currently being deployed in various industries, from cybersecurity to healthcare and telecommunications. Blockchain is still largely associated with cryptocurrencies and is at the core of decentralized finance (DeFi), which involves immutable distributed ledgers. Unlike legacy financial institutions like banks and brokerages, DeFi doesn’t involve intermediaries. Instead, DeFi systems allow peer-to-peer transactions, bringing loans and banking products to the underserved while reducing transaction costs. Here’s an overview of some compelling use cases of DeFi in different industries:

Decentralized Exchange

Also known as DEX, decentralized exchanges are the democratized version of legacy exchanges people use to buy and sell cryptocurrencies like Bitcoin, Litecoin, Ethereum, and other coins. DEX platforms are non-custodial and give users full control of private keys when transacting on the platform. These platforms use self-executing smart contracts to automate trades, and transactions are recorded on a blockchain. To trade one cryptocurrency for another, you’re required to send the asset to a smart contract, which is stored on the blockchain until a match that meets the buy and sell order is met.

Once these conditions are met, the contract executes automatically with the assets remaining in user wallets, eliminating the need for centralized exchanges. DEX platforms are accessible via web interfaces and desktop and mobile applications, with each offering unique features and interfaces. The platforms support crypto-to-crypto trading pairs only, so you’ll need a centralized exchange for FIAT pairings, but this may change in the future. Another option is to convert your FIAT to crypto and then trade using DEX platforms. Decentralized Exchanges support direct interactions with other crypto users.

Online Gambling

The real money gambling sector is another industry that has massively embraced decentralized finance systems. In places like Canada and the UK, players can enjoy slots, roulette, blackjack, baccarat, poker, craps, live shows, crash games, and other real money products using crypto deposits. Some Canadian leading casino sites feature exclusive bonuses that are available only when you deposit using cryptocurrencies like Bitcoin, Ethereum, Litecoin, and stablecoins like Tether. Players can also explore DeFi gambling apps to explore slots, keno, table games, sports betting, and other products.

The gaming industry was among the first to adopt crypto payments, and some sites only accept crypto deposits and withdrawals. These sites have become popular for their fast, secure, and anonymous transactions. Casino and sportsbook operators have also embraced crypto payments because they’re efficient, reliable, and transparent. Transactions are stored in immutable ledgers, which makes auditing less daunting while reducing disputes. Crypto payments also don’t require sensitive data, which helps to protect users from prying eyes. These decentralized payment options give players online anonymity while reducing the cost of transactions because no intermediaries are involved.

Liquidity Providers

Although decentralized exchanges and decentralized finance systems are designed to eliminate barriers to liquidity, such issues still crop up. Before the introduction of automated market makers (AMMs), DEX platforms struggled with low liquidity, which meant users couldn’t buy and sell assets as quickly as they wished. That’s because the initial systems relied on order books, similar to those used in centralized legacy forex and stock exchange systems. However, AMM changed things by using liquidity pools to match buyers and sellers instead of ordering books. Liquidity pools are autonomous smart contracts that store paired cryptos to facilitate instant transactions.

Liquidity providers and pools are decentralized, allowing users to place funds in inaccessible areas where exchanges can facilitate buying and selling opportunities. Those who provide liquidity are incentivized by rewards from transaction fees. For instance, to provide liquidity for the BTC/ETH pool, the liquidity provider adds an equal value for both cryptocurrencies. The provider then receives a liquidity provider token that entitles them to a percentage of the transaction fees earned in that pool. DeFi systems allow liquidity providers to track asset prices, provider contributions, rewards, and other aspects, thanks to immutable, time-stamped ledgers.

Yield Farming

Lending and yield farming are other popular use cases of decentralized finance systems. Just like liquidity providers, yield farmers provide lending opportunities while aiming to receive bonuses, commissions, or profits. Yield farmers get their benefits from the interest on borrowed assets. Also known as crypto staking, yield farming allows investors to earn tokenized rewards when other users borrow funds/assets from the pools they invest in. Yield farming also gives investors significant returns without extra risk. However, fluctuations in crypto prices will affect the profits.

As an investment strategy, yield farming is high-risk and volatile due to the nature of cryptocurrencies. The strategy involves staking, lending, borrowing, or locking cryptocurrency assets on a DeFi platform with the hopes of getting a higher return. Many yield farmers provide flash loans and don’t require collateral from borrowers. However, despite the risk, yield farming or mining is among the key growth factors of the DeFi sector. These arrangements rely on distributed blockchain ledgers to provide transparent records and eliminate the need for centralized investment boats.

Key Takeaways About DeFi Use Cases

There are many other use cases of decentralized finance systems, including non-fungible tokens, insurance, synthetic assets, risk management, infrastructure tooling, digital identification, and AML/CFT compliance. Any sector that requires speedy, secure, and anonymous transactions stored in immutable distributed blockchain ledgers can benefit from DeFi applications. According to industry experts, DeFi applications and democratized systems will dominate the future and are already taking shape.