The rise of decentralized finance (DeFi) applications represent a growing shift in the way consumers are thinking about where they save their money, how they spend their money, and who they entrust with their money.
Indeed, the Edelman Trust Barometer 2020 found that more and more, people are placing their trust in private sector technical experts, academic experts, and other average consumers like themselves --- while trust levels in financial industry analysts and celebrity entrepreneurs fell sharply.
So what does this shift mean for blockchain and cryptocurrencies like Bitcoin? Well, some believe that when more people place their trust in independent experts and in each other as opposed to conventional establishments, there will be a growing appetite for digital, virtual financial platforms --- places where people can put their money without worrying about government interference or traditional middlemen.
Enter DeFi applications. DeFi applications are financial services applications built on distributed ledger technology or blockchains. We explain, in plain English, what DeFi apps are and how they work in our previous article in this series.
In this article, we'll look at 10 ways DeFi applications are replacing traditional financial services, with examples.
Note: Please take these examples as just that --- examples, and not endorsements. Exercise caution and do your research before using any product or service!
DeFi Savings
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In conventional banking as we know it, banks and other financial service providers accept fiat deposits from consumers and then use these funds to engage in other financial activities such as lending or investing with the goal of making a profit. Consumers who deposit their funds typically do so in hope that their deposits will grow in value over time.
1.) SAVE WITH BITCOIN: In the DeFi world, platforms like Choice helps people save for their retirement with not only conventional assets like cash and stocks, but also Bitcoin and other cryptocurrencies. Will Bitcoin reach $20,000? Who knows? Though many believe that more DeFi platforms = more Bitcoin adoption
2.) EARN INTEREST: DeFi platforms like PoolTogether lets consumers pool their crypto together and reward lucky winners with interest generated on the crypto pooled each week. Much like how a traditional bank rewards depositors with a fixed interest rate each year, platforms like these seek to find new ways to reward consumers' crypto deposits.
DeFi Trading
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Banks and other financial institutions help entities and individuals buy and sell securities, currencies, derivatives, and other assets. They act as middlemen who connect buyers and sellers, and earn a profit by taking a cut of transactions.
3.) TRADE LEVERAGED CRYPTO: Fulcrum's DeFi platform lets users lend their crypto assets to earn interest, as well as enter into short and leveraged trades --- the same way investors in conventional markets trade short and leveraged assets through derivatives.
4.) TRADE RARE ITEMS: OpenSea is a digital marketplace that allows buyers and sellers of crypto collectibles and rare digital assets to discover and trade their desired limited-edition goods --- all while protecting their identities and avoiding sky-high intermediary fees.
DeFi Insurance
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The multi-trillion global insurance industry helps organisations and individuals cover risks in exchange for a fee commonly known as premiums. Intermediaries such as insurance agencies and brokers play a big role in this industry, earning a fee whenever they connect insurance providers with new clients.
5.) SOCIAL INSURANCE: VouchForMe lets the people who know you best---your friends and family---vouch for your trustworthiness. The more the trust, the less you pay for insurance. In case of a claim, the deductible will be split proportionally between members of the group who trusts each other.
6.) CRYPTO INSURANCE: Do you trade or own crypto? DeFi services like Opyn lets people buy and sell protection for DeFi deposits and hedge against Ethereum risks.
DeFi Payments
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Banks and other financial service providers made possible the transfer of funds between payers and recipients, whether through electronic funds transfers, credit and debit cards, or other instruments --- charging a small fee for facilitating such transactions.
7.) CREDIT SCORING: Existing credit scoring systems have left out a large fraction of the world's population, making it ever more challenging for the unbanked and underbanked to access credit and other financial services. DeFi platforms like Colendi help provide these groups with a 'financial passport' to access such services.
8.) PAYROLL: Workers around the world typically receive their pay via a fund transfer from their employer's bank account, a cheque or paper money --- with payments made using fiat money. New platforms like Whisp helps companies automate their payroll and pay workers using cryptocurrency, which in turns lets workers receive their pay without the need for a bank account.
DeFi Identity
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Banks have made themselves an indispensable part of the financial and monetary system in part because they serve as the intermediary which lends its credibility to the different parties involved in a transaction. Want a bank loan? Gotta get that seal of approval from your local bank to verify that you're a real human being with the required paperwork.
9.) DIGITAL IDENTITIES: Bloom is a DeFi solution that lets anyone create a secure, verified, reusable digital identity that users can then use to access apps and services without having to verify their identity and financial information every time they do.
10.) OWN YOUR DATA: Jolocom is an open-source platform that lets individuals and organizations create a digital identity while owning and maintaining full control over the data behind said identity.
If you'd like to learn more about the DeFi industry as a whole, click here.
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