Top 10 Decentralized Finance (DeFi) Use Cases

Traditional finance has found its hideout as DeFi has started to take control. However, the future is very much clear as DeFi has arrived here. DeFi is a fundamental driver of disruption in blockchain technology. It has improved old financial procedures, but it has also pioneered new financial concepts such as synthetic assets. As the financial sector undergoes a rapid shift due to DeFi, it's past time for you to explore new alternatives. 

However, proceed further to look at some of the most potential DeFi use cases and how they address the key shortcomings in old financial systems. 

What is a Decentralized Finance?

Decentralized finance (DeFi) is a type of alternative finance that makes use of public blockchain technology to conduct various financial transactions. DeFi's main goal is to provide a viable alternative to the old system's centralized middleman-focused approach.

However, financial structures are provided by banks, brokerages, and other financial organizations in the traditional financial system. Moreover, the first-generation blockchain with cryptocurrency demonstrated the possibilities of different financial infrastructures. Also, People might transact using blockchain technology without the need for a third-party or middleman to function as a validating agent. Ethereum was the first to bring DeFi to the public.

Decentralized Finance use cases

Decentralized finance protocols have opened up a world of new economic activity and opportunities for people all around the world, from DAOs to synthetic assets. However, as evidenced by the extensive list of use cases below, DeFi is much more than an emerging ecosystem of projects, rather, it's a massive and well-coordinated effort to create an alternative financial system on Ethereum that can compete with centralized services in terms of accessibility, resilience, and transparency.

Let's take a look at the most impactful DeFi use cases:

1. Asset Management

One of the most significant effects of DeFi is that users now have more control over their assets. However, many of the most popular DeFi initiatives provide tools for users to manage their assets, such as purchasing, selling, and transferring digital assets. As a result, consumers can earn interest in their digital assets. Moreover, in contrast to the traditional banking system, DeFi allows consumers to keep their sensitive data private. Consider your financial account's private keys or passwords: you have to disclose that information to the appropriate companies previously. With this, asset management is considered one of the most useful decentralized finance applications for users.

2. Compliance and KYT

Know-Your-Customer (KYC) protocols are extensively emphasized in traditional banking systems. However, KYC rules are the company's most important compliance instrument for implementing anti-money laundering (AML) and counter-terrorist financing (CFT) measures. Likewise, KYC rules, on the other hand, frequently conflict with DeFi's privacy efforts. Moreover, DeFi addresses this problem using a more recent notion known as the Know-Your-Transaction (KYT) method. This method implies that the decentralized infrastructure would be more concerned with transaction behaviors and digital addresses than with the users' identities.

3. Decentralized Autonomous Organizations(DAOs)

In DeFi, DAOs are the centralized financial institutions' counterparts, making them one of the pillars of decentralized finance use cases. However, centralized financial entities play a significant role in the traditional system. These organizations function as administrative bodies that oversee basic financial operations like fundraising, asset management, and governance implementation. On the other hand, DAOs are decentralized by nature and do not follow the boundaries set by central governments or agencies.

4. Data Analytics

Users were able to discover and evaluate unprecedented data thanks to transparency and decentralization. However, users may make well-informed company decisions, find new financial opportunities, and improve risk management strategies with access to this data. This industry movement has spawned a new style of data analytics, complete with blockchain tools and dashboards. Likewise, DeFi projects like DeFi Pulse and CoDeFi Data are delivering a lot of value in terms of analytics and risk management. Subsequently, businesses have become more agile as a result of these competitive advantages. Moreover, it is undoubtedly one of the most significant applications of decentralized finance.

5. Derivatives

Tokenized derivatives may be created using smart contracts, which has become one of the most interesting DeFi use cases. However, tokenizing a derivative is the process of determining a contract's value based on an underlying financial asset or collection of assets. Furthermore, tokenization of derivatives is now considered secondary security, and their value fluctuates in accordance with the value of main securities (bonds or fiat currencies). As a result, derivatives effectively create synthetic assets. 

6. Infrastructure tooling

Composability is one of the key design principles of DeFi protocols, which means that different components of a system can readily connect and communicate with one another. Here, many people compare DeFi development to building with legos, earning the moniker "money legos" in the process. Also, Ethereum developers and product teams can now build and launch DeFi protocols with the full-stack tooling and security integrations they require, thanks to Truffle's smart contract libraries, Infura's API suite, and Diligence's security tools.

7. Digital identity

In recent times, blockchain-based digital identities are gaining more traction. However, pairing them with the DeFi protocols would give them easy access to the global economic system. Moreover, the new type of digitized identity would help the underprivileged access DeFi apps from anywhere on the internet. Also, it could be one of the potential use cases.

8. Insurance

Insurance is a major financial industry that has proven to be one of the most prominent DeFi use cases. However, a variety of novel insurance options have emerged to assist customers in obtaining coverage and protecting their assets. Moreover, with the successful implementation of smart contracts, all the issues with the current system can be solved.

9. P2P lending and borrowing

As the traditional banking systems are getting out of the competition due to DeFi, the emergence of a lending and borrowing use case proves to be vital. However, the DeFi ecosystem is appropriate for peer-to-peer borrowing and lending. Several DeFi projects concentrating on this use case have already entered the market. Likewise, Compound and Pool together have autonomous interest-based protocols for borrowing and lending assets.

10. Prediction Market

Users can vote and exchange value on the outcome of events in blockchain-based prediction markets, which harness the crowd's wisdom. However, market prices serve as crowdsourced indicators of an event's likelihood. Augur, a popular DeFi betting platform, offers prediction markets for election results, sporting events, economic events, and other topics.

Conclusion

The Ethereum blockchain ecosystem gave the world new technological capabilities, including digital assets, smart contracts, and decentralized applications (DApps). All of these tools have become essential components of decentralized finance initiatives as they addressed the primary problems in the previous system, DeFi projects quickly became mainstream successes. You can make an entry into the DeFi system with the help of top-tier DeFi development companies.