Top 6 Revolutionary Use Cases of DeFi

David Akilo
By David Akilo
Marcel Deer
Edited by Marcel Deer

Published April 9, 2022.

A stack of cryptocurrency coins next to 4 wooden blocks spelling out DeFi

Decentralized finance (DeFi) covers a range of concepts that describe financial technologies based on distributed ledgers or blockchain technology that remove the intermediaries' role in controlling and disseminating financial services.

Under DeFi, traditional banks cannot dictate the terms of transactions; instead, this function is outsourced to smart contracts. This approach creates a trustless financial structure that promotes seamless trading between strangers. Most DeFi projects exist on the Ethereum network; however, other smart contract-enabled blockchains like Cardano and Solana are catching up.

Compared to legacy financial systems, DeFi offers its users freedom and control over their assets via peer-to-peer transactions, tolerable fees, and access to DeFi-powered services like staking, trading, lending, margin trading, and yield farming.

The Purpose of DeFi in the Real World

Participants in traditional financial systems depend on centralized entities like banks or brokerages for structure and services. However, these entities maintain strict control over the entire system, allowing centralization-focused problems like inaccessibility, high costs, and slow transactions to linger.

DeFi aims to present an alternative to this model with new features and advantages over traditional financial systems. Decentralization allows all interested parties financial accessibility, inclusion, transparency, fairness, and sovereignty.

Under DeFi, traditional financial services like lending, borrowing, and trading are now fully democratized and open to everyone. Businesses that had to go through several hurdles to obtain loans via conventional applications can now do so effortlessly using DeFi protocols.

Top 6 DeFi Use Cases

DeFi goes beyond offering traditional finance service alternatives. The concept of decentralized finance has created new opportunities and given rise to a slew of extensive use-cases capable of going toe-to-toe with traditional legacy systems with the added advantages of speed, transparency, and accessibility.

Important use-cases for decentralized finance technology include:

1. Peer-To-Peer Lending

DeFi presents its users with decentralized P2P lending and borrowing services unavailable in traditional finance. DeFi platforms like Compound and Aave offer these options to users via autonomous interest-based protocols, while others provide collateralized and uncollateralized leading services.

2. Financial Sovereignty

DeFi gives its users full custody over their assets, allowing for the management and deployment of assets without going through intermediaries. With specific DeFi projects like Metamask, users can manage the transfer, purchase, and sale of digital assets and freely deploy them to interest-earning initiatives like staking and yield farming. Unlike traditional banking, DeFi allows users to preserve their privacy and prevent personal or sensitive data leakage.

3. Composability

DeFi protocols can connect, communicate and operate in symbiosis, a feature known as composability that is comparable to building legos and thus has gained the moniker "money legos." Composability is an infrastructure development element of DeFi and allows for the stacking of protocols. This reduces the time taken to create new DeFi platforms, significantly lowering the barrier of entry for developers.

4. Decentralized Autonomous Organizations (DAOs)

DAOs are decentralized organizations made up of a community of individuals but powered by smart contracts. The community has voting power to decide the future of the DAO by creating and submitting roadmap proposals. DAOs are the decentralized counterparts to centralized financial institutions without restrictions, opaqueness, and government influence.

5. Decentralized Insurance Services

Another traditional financial service available in the DeFi space is insurance. DeFi offers decentralized insurance options for users by leveraging smart contracts to remove unnecessary hurdles like slow audit systems and bureaucracy.

6. Accessible Payment Solutions

DeFi offers accessible payment solutions for a class of people known as the 'unbanked' or 'under-banked.' These individuals are cut off from legacy systems due to a lack of facilities in their jurisdiction. DeFi presents a suitable alternative for people who cannot access the conventional global payment systems.

Other DeFi use cases include the creation of derivatives and synthetic cryptocurrencies, decentralized exchanges for managing and trading digital assets without boundaries, and the rising blockchain gaming niche called play-to-earn, which allows gamers to earn spendable cryptocurrencies from their playtime. Play-to-Earn is sometimes known as GameFi, a combination of gaming and DeFi.

Does DeFi Have a Place in Our Future?

There are a plethora of DeFi projects today attempting to provide decentralized alternatives to legacy financial services. Many of these protocols have succeeded, growing robust ecosystems with dedicated communities and mind-blowing total locked value (TVL) figures.

Aside from alternatives to traditional systems, DeFi has its own unique offerings and use cases. Users within this space can participate in passive income options like yield farming, staking, or decentralized savings. DeFi also opens the opportunity for creating virtual worlds with real-life economies; Play-to-Earn and metaverse niches are primary examples of the additional use cases provided by decentralized finance.

Considering the growing use-cases and several upcoming protocols, it is pretty evident that DeFi has a place in the financial future of humanity. Regulatory uncertainty and other demerits like smart contract risks may slow down its growth. Still, as long as developers continue to innovate, we will see new DeFi solutions emerge and perhaps compete or even outdo traditional legacy systems.