With globalization spreading its roots far and wide today, the Fintech industry has grown to massive proportions. Hence, there is a need for decentralized finance (DeFi) development to improve access to basic financial services especially for the unbanked sections of the population. Hence, the businesses of DeFi token creation, DeFi lending and borrowing, and smart contract development have become highly demanded today.
Apart from the above-mentioned services, there has been an increasing rise for Insurance, Stablecoin creation, tokenization of assets, decentralized trading, asset management, and derivative protocols.
Though the concept of decentralized finance is at its infancy stage currently, it requires a lot of improvements to integrate with real-world applications in the future. It should ensure adequate risk management and a high level of liquidity.
Currently, Decentralized Finance has a gigantic market cap of $8.8 billion according to Defipulse.com which keeps a close watch over the growth of the sector.
Decentralized Finance (DeFi) offers a more transparent and trustless ecosystem and eliminates the presence of the intermediaries in the process.
Advantages rendered by Decentralized Finance Solutions
- It is highly interoperable between different platforms and networks. It runs on an open-source permissionless blockchain network.
- No central entity is involved in financial services such as borrowing, and lending. This improves the efficiency of the process and cuts down on unnecessary costs.
- It is completely permissionless in nature and does not involve scrutinization through submission of KYC (Know Your Customer), and credit scores.
- Anyone with a good internet connection and a smartphone can make the use of Decentralized Finance Solutions. Hence, the liquidity offered is borderless and not limited by geographical barriers and different time zones.
- It is non-custodial in nature and users are given complete freedom and control over their respective funds or assets.
- High-end security practices are implemented over all the assets managed on the platform and hence it is unhackable.
Major applications of Decentralized Finance (DeFi) development
- Borrowing And Lending Business – The DeFi ecosystem will profiteer from peer-to-peer borrowing and lending. Users can apply for a loan without a bank account or any detailed review of their applications. The smart contract itself acts as a lender and saves time for the borrower in search of a prospective lender. There is no concept of fixed interest rate and it will be calculated according to the supply and demand conditions of the market. Hence, it makes the cumbersome process of borrowing and lending very easy and saves time.
- Asset Management – Since users have full custody over the management of their respective assets, they can securely interact with the various decentralized applications available for buying, selling, and transferring crypto. Reliable multi-signature enabled crypto wallets such as Metamask, Gnosis, and Argent can be used. They also facilitate the storage of passwords and private keys of the users that can be accessed anytime.
- Gaming – Ethereum-based games such as God Unchained, Mythereum, and Ethermon, and PoolTogether are making waves because of their innovative incentive models.
- Identity Management – It helps locked-up users to get access to the global economic system. It reduces people’s collateralization requirements and assesses the creditworthiness of the users through reputation and financial activity instead of evaluating factors such as income, and homeownership. It also ensures the privacy of user’s data though it permits open access. Users will have complete control over the usage of their data and the management of their assets.
- Insurance – There are some risks in the smart contracts concerned with bugs and data breaches. There are many innovative insurance alternatives today such as Nexus Mutual that uses a combination of blockchain technology and Ethereum for assisting users to buy coverage and protecting their respective holdings. They also provide a smart contract cover that safeguards the users from unintended use of any smart contract codes.
- Predictive Markets – Since much anticipation is done about the future, decentralized prediction markets are emerging that are fully automated. These protocols can be used for ensuring the bugs present in a smart contract. For example, Augur, a decentralized prediction market platform features sports games, election results, and much more. It is highly accessible and also offers a no limit on the betting facility.
- Stablecoins – In an era of uncertainty, stablecoins offer stability as it is pegged to real-world assets such as fiat currencies, gold, or any other well-known cryptocurrencies. They were originally created to reduce the price volatility occurring in cryptocurrencies and make blockchain technology to be used as a viable payment method. Stablecoins can be widely used across a range of applications such as borrowing, lending, remittances, and also for institutional applications like CBDCs (Central Bank Digital Currencies).
- Synthetic Assets – They are a type of crypto asset that offers exposure to other assets such as gold, cryptocurrencies, and fiat currencies. They are generally collateralized by tokens locked into Ethereum-based smart contracts consisting of in-built agreements and incentives. A well-known example would be Synthetix which is a derivatives liquidity protocol supporting derivatives trading in DeFi and has a 750% collateralization ratio helping the network to absorb periodic price shocks efficiently.
- Tokenization – Tokens are nothing but digital assets created and managed on a secure blockchain network for instant transfer. It is one of the cornerstones of decentralized finance. It unlocks various economic possibilities and helps users to access, trade, and store values across the globe.
Apart from the above cases, Decentralized Finance can also be used for payments, data analytics, trading, wallet management, and education.
Obstacles To The Application Of Decentralized Finance Solutions
- Availability Of Fiat On/Off Ramps – Both the on and off-ramps are not quite symmetric. There are problems in converting fiat into crypto seamlessly. The volatility of cryptos is becoming increasingly tough to manage. Locking investor’s funds out of crypto is becoming complex. Hence, it is becoming harder to implement DeFi.
- Issues In Scalability – Since DeFi operates mainly on the decentralized blockchain network, lack of adequate scalability makes it tough to implement for real usage in today’s financial world. The Ethereum Blockchain network which is highly demanded by DeFi Dapps requires high gas costs for every transaction and is proving to be a major issue.
- Lack Of Privacy – Since it operates with a permissionless mechanism, it lacks financial privacy, and proves to be a big stumbling block for incorporating decentralized finance in businesses.
- Lack Of Identity – Since it does not use the analysis of credit scores, it can lead to a tricky situation of over-collateralization.
- Vulnerability In Smart Contracts – Though smart contracts are considered to be highly secure and extensively audited, many DeFi platforms are said to suffer from smart contract vulnerabilities leading to a lack of insurance.
Hence, after going through the above factors, decentralized finance (DeFi) development needs to overcome challenges like scalability, financial privacy, credit scoring, and more. Despite certain shortcomings, decentralized finance solutions will benefit those who are completely isolated from the financial system. It eliminates the chances of a single point of failure and deploying a decentralized finance application is very secure and less complicated. The challenge is not only building the various applications but also thinking about how they fit into the broader DeFi ecosystem. However, DeFi or open finance proposes an entirely new financial system that is independent of the current infrastructure in place.