DeFi or decentralized finance is getting huge users attention. This mainly involves financial services using the smart contracts, which are highly automated agreements that does not require intermediaries like a bank, instead it uses the distributed ledger technology.
Starting from 2017, the DeFi market has arouse to a massive height with the rise in the value of tradable tokens that are used for DeFi smart contracts. Its one of the procedure for disruptive traditional financial technology. Decentralized exchanges are the major systems in which DApps have taken off initially. These are completely the peer to peer platforms without any third party.
DeFi Services allows us to :
Borrow and lend cryptocurrencies in order to earn interest from the platform such as Compound and Aave.
Betting on various outcome of events such as Augar.
Exchange of real-world assets including currencies and precious metals on Sythetix.
No loss lottery such as PoolTogether where all the users get their money back and one lucky user will get the overall interest that has been acquired from the shared pot.
Buying cryptocurrencies such as the stablecoins that will have a pegged value of a particular fiat currency or commodity. The DAI and USDC are pegged to the UD dollar.
Why is there a craze for DeFi?
The first reason for the DeFi Boom was that, the regulators were behind the curve and the DeFi was able to grow up in this vacuum. If we consider the traditional lending, its a form of unsecured process and the legal requirement that lenders and borrowers know each other is another factor, which is not needed in DeFi. Instead, mutual trust and privacy is the major attractive feature of DeFi.
The Second reason includes the surge in the mainstram players who are getting involved in it. As many high-street financial institutions are beginning to adapt DeFi and still many are seeking multiple ways to participate in it, its speeding up the DeFi success.
The third reason include the effect of COVID-19, the pandemic has caused the global interest rates to be lower. But, the DeFi has been offering an annualised interest rate of 6.75% for those who save with stablecoin Tether. The users will get interest for it and will also receive Comp tokens, which becomes as an added attraction. With two thirds of people without bank accounts, DeFi also has the potential to reach them easily.
The Final reason for the users investing in DeFi tokens is to avoid begin left out of their explosive market growth in the future. Tokens that are currently worth nothing now is believed to have a future value. This causes the rise in new financial system that is more liberalised and decentralized than ever before. The main question will be how best its development can be carried out with checks and balances that minimize the risks and spread the potential benefits to the users.
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