In a previous post, we have established how much of a departure from Traditional Finance (TradFi) Decentralized Finance (DeFi) really is. Unlike within decentralized finance, an all-seeing government controls and oversees all bank accounts while monitoring all the transactions within the system.
Besides, transaction costs are prohibitively high, to such an extent that a nice chunk of the global population remains unbanked.
In DeFi, pieces of code replace all this drudgery; smart contracts ensure that all dues are paid and that all transactions are completed accordingly. Code plays the role of bank and at a fraction of a percentage’s cost. Without the requirement of proof of identification or proof of nationality, anyone can plug in and use these DeFi systems, free from any form of government censorship.
So what are some of the main emerging sectors of DeFi as the entire sector gets built from the ground up?
The Main Subsectors Of DeFi
Stablecoins
These act as a bridge between the fiat world and the cryptoverse, being cryptocurrencies whose value is tied to real-world currencies like the US Dollar. Examples of stablecoins whose value is tied to the dollar include USDC and Tether. While they enjoy the speed, flexibility, and cheapness of cryptocurrencies, they are also protected against extreme volatility by the stability Fiat. As such, stablecoins act as ready bridges between the centralized and decentralized worlds.
Decentralized Exchanges (Dexes)
These are online borderless platforms that allow users to switch their tokens and tokens for other coins and tokens.
An immediately visible advantage of dexes is that they are borderless, resistant to any geographical boundaries, and transactions therein are completed for extremely small fees compared to traditional Fiat exchanges.
The fees and rates charged on a decentralized exchange are also burned in immutable smart contract code, away from the whims of any power-drunk government or malicious actors. No banks or governments can come in to freeze any accounts or ban any coins and tokens trading on the dex.
On an exchange like Uniswap, with billions of dollars worth of value locked up in the ecosystem, no government can come in to censure or ban any of the wallets, users, coins, or tokens that use the platform in their millions every day.
Lending and Borrowing
The lending and borrowing market is turning out to be a large one within DeFi and rightly so, as it is correspondingly large within TradFi. The code that runs smart contracts has made such that it is possible for users to lend out their crypto while maintaining strict full custody of their coin holdings.
Compound and Aave are brilliant examples of borrowing and lending platforms, which eliminate all human bias, emotion, and activity from all transactions made. DeFi lending platforms make use of overcollateralized loans which require that borrowers put up more than 100% of whatever sum they are borrowing from the protocol.
Margin Trading
In margin trading, users on the platform can bet on a given coin rising in value and thus use their own coins to time this rise and use it to multiply their returns. Within TraFi, margin trading is often limited by high transaction fees, a prohibitive proof of funds requirement, and the fact that forms of identification and or residence would be required before any margin trading happens.
On the other hand, all you need for margin Trading within DeFi is an internet connection.
Insurance
As this pattern would suggest; an insurance contract is replaced by DeFi’s equivalent of an insurance smart contract, whose code stipulates any conditions that should be met if any payments are to be triggered.
The DeFi insurance setup also works with trusted oracles which feed these decentralized systems with trusted sources of data from the real world.