The financial sector is facing major disruption due to the entry of Decentralized Finance, Cryptocurrency, and Blockchain Technology. The entry of these technologies has brought speed, efficiency, and security to financial procedures. The elimination of intermediaries means users can access their money full time, transfer money internationally, and make transactions without limits.
Related: Understanding DeFi
Main Use Cases
In traditional finance, you give the bank your money, for safekeeping. The money sits in the bank, where the bank uses it for business, by lending to a second bank customer. The money extended to the other customer is charged an interest rate. The bank will therefore get the principal plus the interest from the customer. The interest will be used in running the operations of the business. They will also get a huge profit but will pay you a negligible 0.0001% interest for storing your money with them.
In DeFi, investors pay money to smart contracts in order to lend that money out. The smart contract then pays the money to someone who is looking to get a loan, either to buy a car, grow a business, buy real estate, etc. There is a predetermined set interest rate in the smart contract, where the investor will get paid with their interest, and both parties will walk out with benefits, as the borrower will also pay minimal interest rates.
In traditional insurance, people pool funds. People pay premiums to an established insurance company because they want to hedge against an unlikely event happening, for example, a car accident, a health complication, or maybe a house fire. The insurance will take all the money and put it in a pool - this is the float that the insurance uses for its investments. The insurance will then pay a pinch of it to the unlucky few whose houses fire razed down, or maybe got involved in accidents. The difference between the money collected and the money used in running operations and compensation is their profits.
In DeFi, an individual pays money to a smart contract. The smart contract has insurance investors. If the individual is unlucky and encounters an inconvenience that was insured against, the smart contract will draw the necessary data involved in the compensation, and money will be released to the individual, while the investors will get their cut. The process is automated, therefore frictionless. This results to lower insurance premium costs and higher returns for investors.
Exchanges make money by taking your money and squeezing out as much transaction costs as they can. The old way of exchange is the payment of cash to the exchange, so they could facilitate the exchange of assets.
In DeFi, these third-party intermediaries are eliminated, and only the two people needed in the exchange are involved. A smart contract exists between these two parties and the process is frictionless. There are decentralized exchanges in NEAR Protocol that are designed to fit the needs of all types of users, from novices to experts.
Banks and credit card companies issue credit cards to users for convenience in making purchases and other payments. This means that when making payments to companies that accept credit cards, they will charge some amount to facilitate the transaction.
DeFi simply incorporates smart contracts in these processes, which is much cheaper, frictionless, and with no middleman. All that is needed are two parties involved in the purchases and a smart contract will ensure a seamless process, with negligible to no fees on the buyer and full payments to the seller. The bank and credit card companies are eliminated from the equation.
Read Also: Web 3.0: The Next Internet Revolution
Traditional finance has often revolved around profiting the big financial institutions while making transactions inefficiently slow. DeFi eliminates financial institutions and uses smart contracts to make transactions frictionless while reducing financial burdens on a user. DeFi is simple, fast, easy to use, and low cost.
Sankore 2.0 is an Africa-focused community integrating the NEAR blockchain with projects and solutions conceived and built by local developers in Kenya. As noted in the content of this blog, Sankore 2.0 seeks to promote the development of Web3 products in Nairobi — for Kenya and for Africa as a whole.