Marc Andreessen, the Netscape co-founder, once said that “software is eating the world.” He made this prediction back in 2011 as two-sided software platforms such as Airbnb and Uber began to disrupt old markets and unlock massive sources of supply.
Software has since then disrupted most traditional industries by lowering the complexity of conventional industry operations. However, the finance sector fell behind the disruption curve, maintaining its brick-and-mortar processes until digital currencies and decentralized finance (DeFi).
Before MakerDAO’s 2015 launch, century-old large financial institutions ran the financial sector, subjecting it to age-old inefficiencies via friction-filled processes. Financial institutions would later embrace fintech innovations that enhanced front end-user experience overlooking the failing underlying infrastructure these new programs ran on.
Consequently, Venmo users have a three-day waiting period on bank account transfers. Decentralized finance is the new disrupter in town, unlocking new supply in the financial system. It is a catch-all phrase that describes software’s ongoing bid to disrupt the traditional finance industry.
DeFi Lending and borrowing networks are its most popular applications. These protocols function without the support of intermediaries and give users complete control of their funds. Lending and borrowing protocols operate large liquidity pools that support other use cases such as liquidity mining, yield farming, staking, and asset financing.
Other popular DeFi innovations accomplishing the impossible through decentralized peer-to-peer processes are;
Decentralized Finance Use Cases
Asset management protocols
DeFi wallets such as MetaMask, Gnosis Safe, and Argent crypto wallet support the secure storage of crypto assets. As an illustration, MetaMask stores user seed phrases, passwords, and private keys in an encrypted format locally.
You can buy, sell, and transfer crypto to earn interest on your digital assets securely through these tools. In addition, these tools facilitate crypto-economic research and trade compliance. They can direct users on the best trade execution and reporting process and institutional-grade crypto custody for organizations.
Decentralized asset management gives users access and analytical insights into asset performance just as well as any asset manager can. As an illustration, the Melon Protocol and Set Protocol allow Ethereum wallet holders access to private investment funds.
In contrast, conventional finance asset managers demand high fees for these services, increasing the cost of asset management. Then composability kings such as DeFiZap offer yield, risk management, and layer exposure within a single DeFi transaction. Other Defi asset management tools include Zerion, Defi saver, dHedge, Gnosis, and Yearn Finance.
AML and CFT tools
You have to fulfill KYC in traditional banks to complete a transaction. However, KYC defies the blockchain principle of privacy. The sector’s KYC alternative, Know Your Transaction (KYT), reveals transaction behavior and digital addresses rather than the identity of the users.
MetaMask Institutional KYT helps assess risk in real-time and protects against fraud and financial crimes. Chainalysis KYT, on the other hand, enables companies working with or trading in cryptocurrency to comply with local and global regulations and reduce manual work processes. Chainalysis KYT is a blend of top blockchain intelligence, a user-friendly interface, and a real-time API.
Decentralized Autonomous Organizations (DAOs)
DAOs eliminate central administrative entities in platforms such as Compound and Maker through token governance. Their DAOs support fundraising, decentralized governance, and manage financial operations. For example, Uniswap (UNI) token holders can vote on protocol fee disbursement. DeFi has DAOs for just about any use case.
The SharkDAO’s primary aim is to create individual token holder pools to help them gain access to rare NFTs that would otherwise be too expensive for the ordinary buyer. These pools allow individuals to leverage the power of a collective pool of assets.
Data analytics and risk management tools
Blockchain data transparency allows open access to public network data and transaction activities. As a result, DeFi users can analyze blockchain data, make informed business decisions, discover new financial opportunities, and manage risk.
Analytics tools such as DeFi Pulse and CoDeFi Data can track the value locked in DeFi protocols, assess platform risk, and compare yield and liquidity. Treehouse, on the Binance Smart Chain, provides users with data, analytics, and risk management solutions. It lowers DeFi sector complexity by offering easy-to-read curated information, comprehensive portfolio analytics, in-house risk metrics, and innovative tools.
Derivatives and synthetic assets
To tokenize a derivative is to set the value of a contract based on an underlying financial asset such as bonds, fiat currencies, commodities, market indexes, interest rates, or stock prices. Smart contracts allow the creation of tokenized derivatives that users can trade without owning an underlying asset.
By tokenizing derivatives, DeFi synthetic assets platform lower access to the derivatives market. The Synthetix protocol is one of the sector’s most popular derivative trading protocols.
Conclusion
DeFi adoption has been rapid, reflecting its enormous advantages. But like any other invention, it has challenges such as a low level of knowledge in its operation amongst users, exposing them to high levels of risk.