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Decentralized Finance (DeFi) is an umbrella term for financial products (lending, trading, savings etc.) that don't require a centralized institution like a bank or exchange broker. Instead, they run on smart contracts, which are automatically executed when certain conditions are met. Users transact directly with each other and maintain control over their assets.
First DeFi apps appeared around 2017, but it was in 2020-2021 that the market really exploded, reaching a valuation of $100B. Apps like Compound, Curve and Uniswap handle billions in volume.
Nevertheless, the DeFi industry is facing some formidable challenges. Perhaps the biggest is connecting fiat (traditional currencies, like USD) and crypto. The general consensus is that DeFi can and should foster the coexistence of both fiat and crypto - but how? This guide explores the most promising solutions.
Providing Bank Lending Services for Both Crypto and Fiat
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DeFi can generate a synergy of crypto and fiat by integrating traditional currencies in decentralized financial products. After all, fiat-based banking systems have been the lifeblood of the global economy for as long as there HAS been a global economy. Banking services such as easy lending contribute vastly to the sustainability of the financial sector globally and to the citizens who rely on loans in their daily lives.
DeFi can unite the crypto and fiat worlds by providing similar lending and banking services using BOTH types of currencies in tandem. Examples include Compound, MELD and Aave. Most of these platforms offer loans in crypto and also in fiat, backed by an existing cryptocurrency stake, or the converse. By doing this, a DeFi network crypto holders with faster access to standard fiat assets without losing or diluting their existing crypto stake.
Already, there are multiple DeFi networks providing lending services using both fiat and crypto. Offering cash loans by using crypto as collateral is a good way of fostering this type of old and new currency coexistence.
Allow Fiat Backing in Stablecoins
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Another promising way to allow the coexistence of crypto and DeFi is by leveraging the concept of stablecoins. Stablecoins are simply a class of crypto assets backed by another asset such as Gold, commodities or fiat currencies such as the U.S. dollar.
However, it is vital that more upcoming DeFi projects provide similar stablecoin services to allow for the coexistence of both crypto and fiat in the financial sector. As stablecoins increase, so will their users, resulting in faster crypto adoption.
Lending Fiat Liquidity
Another way for DeFi projects to help ensure coexistence between crypto and fiat is by allowing fiat liquidity pools. A fiat liquidity provider offers its fiat assets to a lending pool - their fiat assets are then used to give other people loans.
One of the existing platforms providing fiat liquidity options is the MELD Protocol. The network will allow investors and institutions to offer fiat liquidity by using the MELD app on mobile, desktop or Web. In the process, the investors will earn yields in high APYs. On top of lending fiat liquidity, this platform will also allow investors to use their line of credit, thus making crypto assets even more liquid.
Allow Investors to Earn Income with Fiat and Crypto
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Savings accounts remain one of the most popular banking products, though falling interest rates and rising inflation mean that real yields on such accounts are zero or even sub-zero. DeFi projects offer similar savings products but provide higher earnings. DeFi yield farming is an excellent example: users lock up crypto tokens and get rewarded with more tokens daily, with nominal APYs often above 100%.
DeFi projects often require other investors to deposit their assets in a liquidity pool (savings account equivalent). The asset is then lent to someone else who offers another asset as collateral.
When lending cash, DeFi projects will often create a liquidity pool for depositing cash, with the cash then offered to others who collateralize crypto in return. However, in this case, the individuals depositing fiat will earn rewards in interest after the loan repayment.
Increasing Ease of Exchanging Crypto and Fiat
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Providing better liquidity of crypto tokens is another way for the Defi space to co-exist with both crypto and fiat. Already, there are many crypto exchanges today offering liquidity for assets - however, it takes a lot of time to change the tokens back into cash with most of them. They are not highly-liquid by default.
However, DeFi projects can help streamline the issue. There are many ways through which this can be accomplished.
Expert Ken Olling, noted several options: "One is by providing the option to purchase crypto directly with bank accounts or other fiat options. Decentralized exchange platforms, for instance, can make it easy for investors to buy crypto using credit cards. By doing that, there will be ease in converting fiat to crypto.
Secondly, DeFi projects can provide instant cash access for those holding DeFi assets. The lending platforms can give crypto investors a line of credit. Moreover, Defi projects can link with banking institutions and other money changers. The result will provide more ease towards exchanging crypto to fiat and vice versa."
Final Word
This guide has been exploring how DeFi can provide coexistence between crypto and fiat. There is a high need to ensure a good link between fiat and crypto for the two to co-exist. DeFi has already been playing a major role in linking fiat and crypto-assets.
DeFi networks provide essential services such as lending and yield farming, all of which can provide space for fiats. In lending, DeFi projects allow people to access fiat loans by using crypto as collateral. By doing that, they provide a pool for investors to offer fiat liquidity. There is no question that DeFi is a powerful new tool in the financial market to bring more money to more people in a safe, liquid and disruptive fashion.
