This article is part of IOV Labs research series that aims to help newcomers to the Web3 world navigate DeFi, explore its benefits, and understand its risks. Read on to learn how individuals and businesses are currently using DeFi, and what the future holds.
The use of decentralized finance products has grown exponentially over recent years. Between 2019 and 2021 alone, the global adoption of DeFi has grown by over 2300%.
Historic web traffic data for DeFi protocols - Source: Chainalysis
According to surveys, DeFi adoption has been primarily focused in developed regions including North America, Europe, and Asia where most users work in the tech or finance industries. These users have stated that they benefit from DeFi to “build their wealth” and “participate in the futuristic financial movement”. However, unlike traditional finance, DeFi is decentralized, permissionless, and has minimum requirements when it comes to accessibility. This is why DeFi offers greater financial freedom and inclusion for the underbanked economies and developing regions such as Latin America and South Africa.
This post explores the top 10 DeFi applications revolutionizing finance and extending financial tools towards emerging economies, essential reading for anyone interested in the field.
Stablecoins have ascended as one of the most popular DeFi use cases, reaching a peak market cap of over $1.6bln in 2022 and having a total value locked (TVL) of $1.3bln. They offer a more accessible, efficient, and stable alternative to traditional finance for managing and transferring value.
Stablecoins are a type of cryptocurrency that maintain a stable/fixed value that is pegged to a certain asset, typically the US dollar such as RDOC, USDT. They are designed to reduce the price volatility commonly associated with cryptocurrencies, making them more attractive for use in transactions and as a store of value.
Decentralized Autonomous Organizations (DAOs) are online platforms designed as a way to allow the community of users to make decisions on the future of a project.
For example, DAOs like DXdao, Aragon enable developers to propose an idea for a dApp (e.g. DEX, NFT marketplace), and collect community votes on whether to proceed with building the dApp or not. If the dApp proposal is accepted by the community, the builders can start raising funds from community members and supporters to start building the dApp.
DAO members can make decisions about the organization based on their voting rights that are proportional to their stake (i.e. equity) in the organization. This allows for a decentralized and more democratic decision-making process, which can lead to more efficient and equitable outcomes.
How DAOs work
Smart contracts are the foundation of DAOs because they enable the creation of a transparent, secure, incorruptible, and decentralized decision-making process that is not seen in more centralized and controlled traditional financial organizations.
A decentralized exchange, or "DEX," is a decentralized platform that facilitates the swapping or trading of one cryptocurrency to another. DEXs utilize smart contracts and liquidity pools -a digital pile of cryptocurrency locked in a smart contract- to allow peer-to-peer crypto swaps without the need for a centralized middleman. This differs from traditional exchanges, which are run by a single entity with complete control over the exchange, leaving users’ funds vulnerable to hacking due to single point of failure issues and single credential theft, and mismanagement due to having a hierarchical decision making process that allows or denies trading processes.
As a result, DEXs, such as Airswap, offer a more secure and transparent option for trading cryptocurrencies. By eliminating the need for a centralized authority, users are able to maintain control over their assets and ensure that their trades are executed in a fair and secure manner.
Decentralized insurance is a type of insurance where users can purchase policies to protect their assets against losses due to risks such as smart contract bugs, hacking attacks, and market volatility. Unlike traditional finance, where the claims settlement process can be slow and bureaucratic, often taking weeks or even months to process, DeFi insurance settlements are typically completed in a matter of minutes.
Decentralized Finance (DeFi) emerged to revolutionize the way we access and use financial services. It allows for greater financial transparency, security, and accessibility, and has the potential to bring the underbanked and unbanked people of the world access to financial services.
DeFi insurance has seen rapid growth in recent times as users seek out more transparent, secure, and efficient insurance solutions. DeFi insurance is set to continue evolving beyond its current iteration and facilitate a larger scope of insurance policies in the years to come.
DeFi Lending and Borrowing protocols allow lenders to deposit their crypto assets into their desired market and earn interest from borrowers in the same way banks do in traditional finance.
However, unlike traditional finance, where individuals must meet certain requirements to be eligible for a loan, such as having a good credit score and a stable income, DeFi lending protocols such as Tropykus, or Sovryn, allow anyone with an internet connection to participate. This has resulted in a significant increase in the number of people who have access to lending services, especially in countries where the traditional financial system is underdeveloped or unavailable.
RIF Gateway provides a DeFi marketplace where individuals and businesses can access a range of trusted decentralized insurance, DEXs, and lending and borrowing protocols for users to explore, compare, and choose the best fit for their needs.
The original use case for DeFi as Bitcoin would put it — secure and efficient payments. Payment protocols, such as RIF Aggregation, Kripton or Lightning Networks, enable users to use cryptocurrency to send and receive peer-to-peer payments over the blockchain without the need for intermediaries.
A prime example of this use case in action is through the buying and selling of goods on decentralized marketplaces. Decentralized marketplaces are online platforms that facilitate direct transactions between buyers and sellers. These marketplaces offer several advantages over traditional centralized marketplaces, including increased security, reduced transaction costs, and improved transparency.
Payments have now also extended to centralized applications, for example, companies such as Microsoft, AT&T mobile company, and even Burger King have started accepting BTC as a formal payment method for their services. This, in turn, indicates a growing trust in cryptocurrency as a legitimate source of funds.
Almost every DeFi product allows users to earn interest on their savings through various staking mechanisms. Users put up their assets as collateral on the platform and receive rewards from the fees, similar to earning interest on a traditional bank deposit.
Certain platforms, such as the RIF Wallet or Money On Chain, have optimized this process such that they utilize methods where users' assets are moved from one DeFi platform to another in an attempt to receive the highest returns.
Cross-border payment using cryptocurrency is one of the most beneficial and straightforward use cases in DeFi. A recent report from the World Bank found that In Q3 2022, the global average fee for sending remittances was 6.3%. Blockchain solutions such as RIF Aggregation, Liquality, Nelo Network, and Defiant lower this fee to closer to zero, resulting in significant savings for people who send money abroad regularly.
Decentralized remittances also offer the added benefit of speed — with even the slowest transfers confirmed within minutes. This is in contrast to traditional remittances, which can take several days to be processed.
Tokenization of assets is a promising use case for DeFi. It allows for a digital representation of a real-world asset, such as real estate or precious metals, to be created in the form of a tradable token on the blockchain.
Tokenization platforms such as Fireblocks enable the asset to be easily transferable and divisible, making it accessible to a broader range of users and investors. Tokenizing assets eliminates the barriers for individuals who are currently unable to invest in high-value assets. Anyone with an internet connection could buy a share of a property in Manhattan at the click of a button, without any minimum investment amounts or complex regulations holding them back.
Decentralized identity and verification systems give individuals control over their personal data. As DeFi protocols evolve to become more mainstream, providing a secure, efficient, and decentralized way of managing personal information will become paramount.
Proposals for self-sovereign identity protocols, which give users full guardianship over their own identities and data, have gained traction after recent data hacking and identity theft incidents. The ability to verify identities and creditworthiness without the need for a centralized intermediary significantly reduces the potential for such breaches. For example, Rootstock Naming Service (RNS) makes it easy to integrate a self-sovereign identity (SSI) protocol into different DeFi products, providing security and flexibility to end users.
The above mentioned ideas cover only a few use cases of decentralized finance, and there are numerous DeFi protocols and dApps revolutionizing the future of finance. To that end, traditional fintech businesses are realizing the growing interest in DeFi use cases, and are investing in incorporating such use cases in their processes. And to ensure safe implementation of DeFi use cases, governments and legal entities are looking into developing regulations and policies that help in safe adoption crypto, creating a need for compliance-related DeFi dApps, such as risk assessment protocols, and Anti-money laundering (AML) and Know Your Transaction (KYT) protocols.
This is a clear indication that everyday businesses are slowly accepting the need for DeFi, not only because of its benefits, but because of growing user demand for better and more inclusive financial tools.
Don’t know where to start? Explore how your business can leverage RIF products to optimize your processes and provide your customers with a better experience.