If you hear about DeFi payments and scratch your head, you are not alone.
DeFi payments have only recently ventured into the crypto world and quickened its adoption pace. That’s the reason many of us might not have heard much about it.
But if you’re to agree with financial and crypto specialists, DeFi payments are going to bring a major technological revolution in the way payments are being handled digitally.
At the time of writing this blog, you’ll be amazed to know that there are more than 4 billion dollars of funds already locked in DeFi this year. And this number was achieved within 6 weeks from one billion USD. How amazing is that!
DeFi, since its inception, has garnered the attention of crypto laureates and investors.
Let’s now learn what exactly DeFi is?
DeFi is an abbreviation to Decentralised Finance.
It can be understood as a means to recreate the conventional financial system with no middlemen.
DeFi is all about leveraging blockchain technologies (such as decentralized asset custody, smart contracts, etc.) to replace the middlemen or intermediaries with technical codes, maximizing services’ efficiency, and minimizing the costs.
What payment system does DeFi create?
DeFi referred to creating a system that’s
- Permissionless, and
So, now you get why DeFi has garnered so much attention and discussions around it! DeFi’s promises to offer a financial ecosystem without any central authority is just so overwhelming for crypto enthusiasts.
Currently, the majority of these DeFi based applications or ecosystems are being created on Ethereum. But other advanced platforms offering smart contract capabilities may also work.
How will DeFi guide future Crypto Payments?
Crypto Payments were accepted by the marketplace comfortably. But to start off, you must know that DeFi exists due to stablecoins.
If you don’t know much about StableCoins! Read An Insight Into The Impact Of Stable Coins Globally.
Moving forward, unlike other cryptocurrencies (such as Bitcoin) who are well known for the volatility of their value, stablecoins are pegged to a fiat currency.
If you think of creating a contract or any financial product with a volatile asset, it will be impractical. But with stablecoins it’s practical and that’s what DeFi contracts do. The DeFi-based contracts have incorporated stablecoins at the core of their functionality.
A few of the common types of stablecoins are as follows:
- Tether (USDT)
- Gemini Dollar (GUSD)
- MakerDAO (DAI)
- TrueUSD (TUSD)
- Paxos Standard (PAX), and many more
Now let’s discuss how DeFi might guide or affect crypto payments in the future:
You might already know how digital payments have evolved. Taking loans or borrowing money is just a click away from us. Apps such as Alipay are used to manage our assets.
You’ll be astonished to note here if you’ve 20,000 dollars in spare and are willing to put it in a fixed deposit, you’ll be gaining 480 dollars yearly on it. But, if you tend to borrow or loan the same amount of 20,000 dollars, you might have to pay an interest of around 2500 dollars a year.
Can you guess why such a vast discrepancy exists?
Yes, it’s because the intermediary parties involved in the loaning and borrowing process take an enormous cut as their service fee.
DeFi payments can change this process for good. With smart contracts built using DeFi technology, they can perform intermediaries’ actions present in the conventional financial system. Similar to the intermediaries, these smart contracts can
- Accept and manage deposits
- Handle collateralized loans,
- Liquidate collateral assets,
- and much more
You must also note that contract codes cannot be terminated or manipulated by anyone as they’re built on a blockchain.
Aave, Maker, and Compound are a few DeFi lending platforms that might check out.
Almost all financial transactions demand the presence of centralized custodial service providers due to the counterparty risk.
You might ask what counterparty risk is? It’s a risk of you or the other party not receiving the funds or assets in a trade after you have paid in advance.
The same risk exists in other forms of trades such as real estate transactions, stock trades, and even OTCs (over the counter) exchanges. A third party exists to mitigate the existing counterparty risk in each trade or exchange process.
These third-party institutions tend to charge a transaction fee for providing centralized custodial services, which may up to 5-8% for OTC transactions.
DeFi introduces us to the method of ‘non-custodial’ exchanges. Within the DeFi-supervised exchange or trade, the codes, i.e. the smart contracts or decentralized key management systems (like that of Fusion’s DCRM), will hold the involved parties’ assets.
The above process is also referred to as peer-to-peer (P2P) exchange.
Synthetic, Bancor, Kyber, and Uniswap are a few examples of decentralized exchanges that you can check!
Conclusion to DeFi Payments
Apart from the above two use cases, DeFi can also be leveraged for Synthetic Asset Bridges, Asset Management protocols, Decentralized market predictions, and much more.
You must note that Cryptocurrencies such as Bitcoin are undoubtedly significant for specific functionality, such as a store of value, but they’re difficult to use as collateral.
Till the time DeFi takes the main seat, platforms such as Payscript that act as crypto wallet cum payment gateways are there to simplify our cryptopayments. Payscript allows quick transactions with top-notch security to transact any cryptocurrency you might have to deal with. You can transfer Bitcoin and Ethereum through the Payscript wallet.
DeFi has a long path to travel for revolutionizing the digital payments sector. Today, organizations of all sizes and tech geeks are finding ways to make the most of it. However, the best thing is that DeFi is becoming more mature with each passing day.
In the payments sector, most people thought DeFi might be a short-term trend. But it’s not so, with current stats and pace, DeFi might fundamentally innovate our financial systems.
With DeFi emerging on the bigger picture, our current and conventional financial system is bound to witness major changes in the foreseeable future.
We must note that most innovations are controlled through a lack of user acceptance and a reluctance to tackle new systems. Moreover, there’s an imperative need to present users with a trustworthy and experience-based system to succeed as a widely acceptable finance application/system.
With current advancements, we might soon witness financial institutions transforming into ‘coding factories’. However, if you’re thinking of investing in DeFi, we would suggest you conduct your own extensive research as many DeFi projects are still speculative.