DeFi
DeFi, stablecoins and mainstream adoption, AND CIO
Raj Karkara, COO, ZebPayCrypto has been a game changer in modern finance, transforming the way financial transactions are viewed and conducted. By moving from a technical tool and digital asset to a financial mainstream, it has the potential to bring financial inclusion and empower those excluded from the formal system financial services.
Several key pillars of the crypto space are helping to drive this change, including the rise of decentralized finance (Challenge) platforms, stablecoins and the use of cryptographic tokens for peer-to-peer transactions.
The DeFi disruption
Decentralized finance (DeFi) platforms can improve the accessibility, transparency, and efficiency of financial services. By leveraging blockchain technology, DeFi platforms can provide multiple financial services such as lending, borrowing, and remittances. This can make finance more democratic and provide individuals with the opportunity to be part of an inclusive and transparent financial system.
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At its core, DeFi is a peer-to-peer network powered by smart contracts that automate transactions. These contracts reduce costs, streamline processes, and eliminate the need for intermediaries. Smart contracts provide access to various financial services to anyone with an internet connection, regardless of their geographic location or socio-economic status.
DeFi uses blockchain, a secure and immutable ledger technology where transactions are recorded and verified through numerous automated processes. This means that transactions can be traced and verified by anyone. Additionally, DeFi platforms offer multiple options to meet diverse user needs with their decentralized nature, ensuring users have greater control over their assets.
By effectively ensuring the reach of financial services to the underserved population, DeFi can bridge the gap between the banked and unbanked. Through DeFi platforms, people excluded from the traditional financial system can access loans, savings and other essential financial services. It helps automate processes and reduces transaction costs.
The role of stablecoins
The emergence of stablecoins has facilitated crypto use cases. At a fundamental level, stablecoins are digital assets tied to real-world stable assets like fiat currencies or commodities and serve as a bridge between crypto and the stability that traditional fiat currencies offer. Crypto offers fast transactions on the blockchain and, combined with the stability of fiat currency, will be a game-changer. On the other hand, stablecoins smooth out price fluctuations and provide a reliable exchange rate that builds trust. Stablecoins are designed to mimic the price stability of fiat currencies like the US dollar, euro and others.
By pegging their value to these assets, stablecoins offer users the stability benefits and efficiency of blockchain. For every stablecoin unit in circulation, an equivalent amount of reserve asset is stored, ensuring direct fixation. At the same time, crypto-backed stablecoins are backed by a pool of other crypto assets rather than fiat currencies. Smart contracts and algorithms govern the ratio and keep it stable.
Algorithmic stablecoins rely on mathematical algorithms and supply adjustments to maintain a stable value without requiring collateral reserves. They are stable, provide users with a reliable medium of exchange and store of value, and can be used to send money to family and friends, or make global online payments in some cases.
This system is transparent and open to audits, allowing users to independently verify transactions and collateral held, thus playing a vital role in wider adoption.
Achieving financial inclusion
The ability to break down barriers and make financial products accessible to everyone with the click of a button is a key advantage.
By providing tools for transparent and secure transactions, cryptocurrencies can ensure that the unbanked participate in the global financial system on their terms. From migrant workers sending remittances home to entrepreneurs seeking capital for their businesses, cryptocurrencies can make it easier and more efficient to dismantle barriers and help create an inclusive and equitable financial landscape.
In regions where access to financial services is limited, cryptocurrencies offer a secure platform to store and transfer money via a wallet. Cryptocurrency transfers are fast and can be done with just a smartphone and a working internet connection. In regions where traditional financial institutions are scarce, cryptocurrencies can offer a secure platform to store and transfer wealth with a cryptocurrency wallet.
Cryptography facilitates cross-border transactions by eliminating high fees and long processing times and facilitating borderless transactions with minimal costs, enabling seamless money transfers globally.
Cryptocurrencies enable access to essential financial services, such as credit savings accounts, through decentralized applications (DApps). They can help the insurance industry reduce fraud and increase transparency. By using the immutable ledger of blockchain, insurance companies can detect fraudulent claims, while smart contracts can automate underwriting processes. Some cryptocurrency companies often allow users to earn interest on their cryptocurrency holdings or borrow money.
There is no doubt that cryptocurrencies are becoming mainstream, fueled by DeFi, stablecoins and major macroeconomic transformations. They are changing daily transactions, democratizing access to financial services and reshaping the global economy. Government, regulators and cryptocurrency businesses must work in tandem and ensure that regulation helps spread the use of cryptocurrencies. By fostering collaboration, innovation and responsible stewardship, we can harness the full potential of cryptocurrencies and chart a path towards a more inclusive and prosperous future.
Disclaimer: The opinions expressed are those of the author alone and ETCIO does not necessarily endorse them. ETCIO shall not be liable for any damage caused to any person/organization directly or indirectly.
The author is Raj Karkara, COO of ZebPay.
- Published on June 28, 2024 at 4:08 p.m. IST
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