DeFi
DeFi, stablecoins and mainstream adoption, AND CIO
Raj Karkara, COO, ZebPayCryptocurrency has been a game changer in modern finance, transforming the way everyone perceives and conducts financial transactions. As it moves from being a technical tool and digital asset to the mainstream of finance, it has the potential to drive financial inclusion and empowering people excluded from formal education financial services.
Several key pillars of the crypto space are helping to drive this change, including the rise of decentralized finance (Challenge), 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 taking advantage 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 enabled by smart contracts that automate transactions. These contracts reduce costs, streamline processes and eliminate the need for middlemen. Smart contracts provide the ability to access 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 provide adjustments to maintain a stable value without the need for 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 online payments worldwide 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.
Achieve financial inclusion
The ability to break down walls and make financial products accessible to everyone with a single click 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. Whether it is migrant workers sending remittances home or entrepreneurs seeking capital for their businesses, cryptocurrencies can facilitate and increase the removal of barriers and help create an inclusive and equitable financial landscape.
In areas where access to financial services is limited, crypto offers a secure platform to store and transfer money via a wallet. Crypto 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 crypto wallet.
Crypto facilitates cross-border transactions by eliminating high fees and long processing times and facilitating borderless transactions with minimal costs, thereby enabling seamless money transfers on a global scale.
Crypto provides access to essential financial services, such as savings and credit accounts, through decentralized applications (DApps). This can help the insurance industry reduce instances of fraud and increase transparency. Using blockchain’s immutable ledger, insurance companies can detect fraudulent claims, while smart contracts can automate underwriting processes. Some crypto companies often allow users to earn interest on their crypto 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 and ETCIO does not necessarily endorse them. ETCIO will not be responsible 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 PM IST
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