Decentralized Finance (DeFi) is an umbrella term covering monetary products (loan, buying and selling, deposits, and so on) that do not require a centralized organization such as a bank or alternate dealer. Instead, they are based on rational contracts that are routinely carried out when certain conditions are met. Customers transact with one another in real-time while maintaining control over their property.
The first DeFi apps came in 2017, but the business really took off in 2020-2021, reaching a valuation of $100 billion. Compound, Curve, and Uniswap are just a few of the apps that deal with billions of dollars in transactions.
Nonetheless, the DeFi industry is up against some serious obstacles. Perhaps the most significant is the link between fiat (traditional currencies such as the US dollar) and cryptocurrency. The general opinion is that DeFi can and will help both fiat and crypto coexist but how? This material looks into the most promising alternatives.
Table of Contents
Offering Financial institution Lending Providers for Each Crypto and Fiat
By incorporating traditional currencies with decentralized monetary products, DeFi can create a crypto-fiat synergy. Regardless of the circumstances, fiat-based banking methods have been the lifeblood of the global financial system for as long as there has been one. Simple lending and other banking services contribute significantly to the global financial sector’s long-term viability, as well as to the citizens who rely on loans in their daily lives.
DeFi can bring the crypto and fiat worlds together by providing linked loan and banking services that use BOTH types of currencies simultaneously. Compound, MELD, and Aave are among examples. Most of these sites offer loans in both crypto and fiat, secured by a current cryptocurrency stake or the other way around.
As a result, DeFi community crypto holders will have faster access to simple fiat property without losing or diluting their current crypto ownership.
There are already a number of DeFi networks that provide loan services in both fiat and crypto. Providing money loans with crypto as collateral is an effective way to promote this type of coexistence of old and new foreign currencies.
Enable Fiat Backing in Stablecoins
Another interesting technique for enabling crypto and DeFi coexistence is to use the concept of stablecoins. Stablecoins are a type of cryptocurrency that is backed by another asset, such as gold, commodities, or fiat currencies like the US dollar.
However, more emerging DeFi projects must supply comparable stablecoin services to allow for the coexistence of crypto and fiat in the financial industry. Customers will improve as stablecoins improve, resulting in faster crypto adoption.
Lending Fiat Liquidity
Another way for DeFi tasks to help ensure crypto-fiat coexistence is to allow fiat liquidity pools. A fiat liquidity provider contributes its fiat assets to a lending pool, which are then utilized to make loans to other people.
The MELD Protocol is one of many contemporary systems that provide fiat liquidity options. Traders and institutions will be able to provide fiat liquidity through the MELD app on mobile, desktop, and the Internet. Traders will earn high APY yields as a result of this process. This platform can also allow traders to use their line of credit score in addition to providing fiat liquidity, making crypto assets even more liquid.
Enable Traders to Earn Revenue with Fiat and Crypto
Savings accounts remain a popular banking product, even though decreasing interest rates and rising inflation mean that actual yields on such accounts are zero or even sub-zero. DeFi projects offer similar financial savings products, but with a higher profit margin. Customers lock up crypto tokens and are rewarded with more tokens every day, with nominal APYs frequently exceeding 100% in DeFi yield farming.
Typical DeFi jobs necessitate different traders depositing their assets in a liquidity pool (financial savings account equal). The asset is then lent to someone else in exchange for another item as collateral.
When lending money, DeFi tasks will usually form a liquidity pool for depositing funds, which will subsequently be distributed to others in exchange for crypto collateral. Nonetheless, in this instance, those who deposit fiat will receive interest after the mortgage is paid off.
Increasing Ease Of Exchanging Crypto And Fiat
Another method for the Defi space to coexist with both crypto and fiat is to improve the liquidity of crypto tokens. There are already several crypto exchanges that provide liquidity for assets; however, most of them take a long time to convert tokens back into cash. By default, they aren’t very liquid.
DeFi projects, on the other hand, can aid in the resolution of the problem. There are a variety of approaches that can be used to accomplish this.
“One is by providing the possibility to acquire crypto directly with bank accounts or other fiat choices,” said expert Ken Olling. For example, decentralized exchange systems can make it simple for investors to purchase cryptocurrency with credit cards. Converting currency to crypto will be easier as a result of this.
Second, DeFi initiatives can provide those with DeFi assets with immediate cash access. Lending platforms may be able to provide crypto investors with a line of credit. Furthermore, Defi projects can connect with banks and other money changers. As a result, it will be easier to convert crypto to fiat and vice versa.”
The purpose of this guide has been to look at how DeFi might let crypto and fiat coexist. For the two to coexist, there is a strong need to ensure a robust relationship between fiat and crypto. DeFi has already played a significant role in bridging the gap between fiat and crypto-assets.
DeFi networks provide critical services like lending and yield farming, all of which can be used to store fiat currencies. DeFi programs enable people to obtain fiat loans by pledging bitcoin as collateral. By doing so, they create a pool of investors who can provide fiat liquidity. DeFi is undeniably a powerful new weapon in the financial industry for getting more money to more people in a secure, liquid, and disruptive manner.
Also Read: Top 10 Crypto Rug Pulls In DeFi