6 Use Cases for Smart Contracts in Decentralized Finance (DeFi)

While many people are still skeptical of bitcoin, the use of blockchain in some businesses and for specific processes has achieved widespread acceptance. Decentralized Finance is one of the blockchain’s solutions that has gotten a lot of attention (DeFi).

New Opportunities for Small and Medium Businesses:

While most banks are stuck in large, cumbersome legacy systems that make transformation difficult, DeFi has removed many of the hurdles to entry that have kept SMEs and startups out of the market. While many institutions see this as a danger, several large banks have recognized the value of small enterprises’ agility and have set up incubators and accelerators to help them bring their blockchain solutions to market.

The first step in entering the DeFi ecosystem is to choose an appropriate service that will fill a market gap. There are several use cases, ranging from traditional financial models, such as payments, to novel instruments, such as tokenization and stable coins.

Peer-to-peer Transactions and Payments:

Trusted third parties, or intermediates, such as banks and agents, are no longer required with distributed ledger technology (DLT). Smart contracts take over the approvals and processes that these traditional players used to do. Transactions have witnessed how this reduces transaction costs and complexity. It may also speed up the transaction, ability the high speed of traditional financial platforms cannot currently be matched due to the mechanics of confirming transaction authenticity.

While the majority of individuals still use fiat accounts, there is a trend toward utilizing crypto for peer-to-peer payments, particularly cross-border payments, where the price of money transfers and the time it takes times losses for both the sender and the recipient. Traditional retailers are also beginning to accept the biggest cryptocurrencies.

Digital identity:

The importance of each human being having a distinct identity has already been stated. Rather than issuing identity cards or physical passports, the only practical approach to provide everyone with an ID in the shortest amount of time is to use a digital ID. So, This is the reason why digital identity is such an important part of DeFi.

Digital Marketplaces:

One of the most prominent DeFi use cases is the creation of marketplaces that connect buyers and sellers, depending on smart contracts to facilitate direct exchanges without the need for a middleman or a broker. The market’s scope is very broad, ranging from community-based, localized marketplaces that promote small businesses by rewarding customers with tokens for buying local to markets that provide sellers access to global markets without having to deal with brokerage firms like Amazon and eBay. Collectors and investors can also participate in niche markets, such as those in the art industry.

The energy and data marketplace:

Although energy and data are essentially different types of currency, the smart grid’s growth and the growing demand for data to power communications via mobile and other devices has made this a vital market for consumers, particularly in poor countries. Prepaid internet and power are used by the bulk of these customers, and Electroneum is a pioneer in providing top-up capabilities via an app supported by a DeFi infrastructure.

Peer-to-peer energy trading is also possible, as well as users selling surplus capacity back to the grid. In order to meet the planet’s requirement for a carbon-free future, providers in this field are primarily focusing on renewable energy. The name of this market is “DeEn” (Decentralized Energy).

Borrowing and Lending:

The difference between the interest rates paid to investors and savers and the rates at which they lend this money to borrowers has traditionally been the source of profit for financial markets. Many borrowers are unable to obtain loans because of strict credit standards, which need assurances in the form of collateral.

Borrowers who would not qualify for a loan from a traditional financial institution can use DLT to directly access cash from one or more investors, with the loan defined and monitored via a smart contract. Other models, many of which are in the mortgage industry, such as BlockFi, will lend fiat against cryptocurrency collateral and even pay interest.

Also, Read: https://brugu.io/blog/business-guide-to-defi-lending-borrowing-defi-lending-borrowing-platform-development/

Tokenization:

The value of blockchain as a platform has been acknowledged as technology matures. Originally, blockchain was all about bitcoin, but as the technology grows, the value of blockchain as a platform has been recognized.

There are still hazards associated with cryptocurrencies, particularly the market’s volatility. This has resulted in the development of tokens such as stablecoins, which are connected to major currencies such as dollars or euros and provide market stability.

Understanding the Risks of Smart Contracts:

While the future of blockchain appears bright, and many current business models are likely to transfer to the blockchain in the near future, it is still a new market. At first appearance, DeFi appears to be a terrific way to swiftly launch a new financial product, but a thorough grasp of the risks associated with smart contracts is essential.

These can include the following:

• Incorrect contract structuring due to inaccuracies in coding and/or specifications
• Inadequate cybersecurity defense to guard against hacking
• Legislative changes. Many governments are still figuring out how to regulate the crypto market, and changes to the contract structure can be made.
• Contracts are being used inefficiently, resulting in excessive costs. While Ethereum isn’t the only platform that supports DeFi, it controls 80% of the market. Smart contracts require “gas,” which must be paid every time a contract is executed. This can lead to unforeseen costs, making the DeFi application unprofitable and thus unappealing to potential clients.

Many of the companies and organizations that have already implemented blockchain solutions now recognize the value of auditing smart contracts and mitigating potential risks. In this special smart contract, audits help to optimize smart contracts and find the threats in smart contract codes.

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