In the past, the utility of cryptocurrency has been limited. DeFi is beginning to change that
Ever since the announcement of Bitcoin, one of the biggest challenges for crypto has been its utility. Bitcoin is an excellent store of value, but not yet scalable enough to be a true currency. Despite a wave of Ethereum-powered ERC20 tokens there have been few projects with the utility and scalability to make cryptocurrency useful. This began to change with the invention of Decentralized Finance (DeFi) projects.
DeFi projects attempt to emulate existing financial instruments — but without the middle man.
For example, it is possible for users to take out loans entirely in cryptocurrency without ever having to pass a credit check or speak with a bank. DeFi apps can do this by using smart contracts. These are essentially lines of code that trigger when specific circumstances are met.
An example of this is the concept of flash loans. They are a specialized kind of crypto loan used in arbitrage. But they will only trigger if the borrower is able to gain enough money in a single transaction to pay back the loan, interest, and fees. If they are unable to do this, the transaction is considered void and never happens.
DeFi is powerful because it is forming the foundation of a new crypto ecosystem free from fiat currencies. If you own Ethereum it is possible to take a loan on AAVE, exchange cryptocurrencies on UniSwap, or manage your investments on dHEDGE. Users can often do this without handing over any personal information. Why is this so important? DeFi is just the first and most obvious use of cryptocurrency. It has also led to the creation of novel cryptocurrency uses, such as non-fungible tokens (NFTs) which represent real world assets. An excellent example of this is the NBA’s top-shot, which allows people to own specific clips of NBA play.
As the DeFi sector evolves, and other sectors spin off from it, we will see crypto become more useful in its own right. This will eventually reduce the need for fiat when interacting with the crypto ecosystem, and help to bring true utility to crypto coins and tokens.
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Independent researcher and consultant, Tech Writer at Blockchain Technology. From Italy