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Decentralized Finance (DeFi) is an umbrella term for financial products (lending, trading, savings, etc.) that do not require a centralized institution like a bank or stockbroker. Instead, they run on smart contracts, which are automatically executed when certain conditions are met. Users trade directly with each other and retain control of their assets.
The first DeFi applications appeared around 2017, but it was in 2020-2021 that the market really exploded, reaching a valuation of $100 billion. Apps like Compound, Curve, and Uniswap handle billions in volume.
Nevertheless, the DeFi industry faces formidable challenges. Perhaps most important is connecting fiat (traditional currencies, like USD) and crypto. The general consensus is that DeFi can and should foster the coexistence of fiat and crypto – but how? This guide explores the most promising solutions.
Provide bank loan services for Crypto and Fiat
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DeFi can generate a synergy of crypto and fiat by integrating traditional currencies into decentralized financial products. After all, fiat-based banking systems have been the cornerstone of the global economy for as long as there has been a global economy. Banking services such as Easy Loans contribute greatly to the sustainability of the financial sector globally and to the citizens who depend on loans in their daily lives.
DeFi can unite the crypto and fiat worlds by providing similar lending and banking services using BOTH types of currencies in tandem. Examples include Compound, MELD and Aave. Most of these platforms offer crypto and also fiat loans, backed by an existing cryptocurrency stake, or vice versa. By doing so, a DeFi network provides crypto holders with faster access to standard fiat assets without losing or diluting their existing crypto stake.
Already, there are several DeFi networks providing lending services using both fiat and crypto. Offering cash loans using crypto as collateral is a good way to foster this kind of coexistence of old and new currency.
Allow Fiat Backing in Stablecoins
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Another promising way to enable the coexistence of crypto and DeFi is to leverage the concept of stablecoins. Stablecoins are simply a class of crypto assets backed by another asset such as gold, commodities, or fiat currencies such as the US dollar.
However, it is essential that other upcoming DeFi projects provide similar stable services to enable the coexistence of crypto and fiat in the financial sector. As stablecoins grow, so will their users, which will accelerate crypto adoption.
Fiat Loan Liquidity
Another way for DeFi projects to help ensure coexistence between crypto and fiat is to allow fiat liquidity pools. A fiat liquidity provider offers their fiat assets to a lending pool – their fiat assets are then used to make loans to other people.
One of the existing platforms offering fiat liquidity options is the MELD Protocol. The network will allow investors and institutions to offer fiat liquidity using the MELD app on mobile, desktop or web. In the process, investors will earn returns in high APYs. In addition to lending fiat cash, this platform will also allow investors to use their line of credit, making crypto assets even more liquid.
Allowing Investors to Earn Income with Fiat and Crypto
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Savings accounts remain one of the most popular banking products, although falling interest rates and rising inflation mean that the real returns on these accounts are zero or even below zero. DeFi projects offer similar savings products but generate higher revenues. DeFi yield farming is a great example: users lock in crypto tokens and are rewarded with more tokens every day, with nominal APYs often over 100%.
DeFi projects often require other investors to deposit their assets in a liquidity pool (savings account equivalent). The asset is then lent to someone else who offers another asset as collateral.
When lending money, DeFi projects often create a pool of liquidity to deposit money, with the money then offered to others who guarantee the crypto in return. However, in this case, people depositing fiat will earn interest after the loan is repaid.
Increased Ease of Crypto and Fiat Exchange
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Providing better crypto token liquidity is another way for the Defi space to co-exist with crypto and fiat. Already, there are many crypto exchanges today offering liquidity for assets – however, it takes a long time to turn tokens into cash with most of them. They are not very liquid by default.
However, DeFi projects can help streamline the issue. There are many ways to achieve this.
Expert Ken Olling noted several options: “One is to provide the ability to buy crypto directly with bank accounts or other fiat options. Decentralized exchanges, for example, can make it easy for investors to buy crypto using credit cards. By doing this, it will be easy to convert fiat to crypto.
Second, DeFi projects can provide instant access to liquidity for those who hold DeFi assets. Lending platforms can grant crypto investors a line of credit. In addition, Defi projects can establish links with banking institutions and other exchange offices. The result will facilitate the exchange of crypto to fiat and vice versa.
This guide explored how DeFi can ensure coexistence between crypto and fiat. There is a great need to ensure a good link between fiat and crypto so that the two coexist. DeFi has already played a major role in linking fiat and crypto-assets.
DeFi networks provide essential services such as lending and yield farming, all of which can provide space for fiat. In lending, DeFi projects allow people to access fiat loans using crypto as collateral. By doing so, they provide a pool for investors to offer fiat liquidity. There is no doubt that DeFi is a powerful new tool in the financial market to bring more money to more people in a safe, liquid and disruptive way.