DeFi: What is it and How is it Impacting the Cryptocurrency Industry?

When you’re looking to bring your business into the new world of digital currencies and token trading, there are a lot of new things that you need to start understanding, which can be an incredibly daunting task if you’ve never worked with any of these types of assets in the past. When you’re beginning to look into cryptocurrency and the industry that surrounds it, one of the most important things to understand is decentralised finance, which is known across the industry as DeFi.

Read on below to learn more about DeFi and the importance that it holds within the world of crypto.

DeFi is, in essence, a class of automated products that are based on smart contracts, running on blockchains with the goal of replicating the existing financial services in a way that’s more open, more integrated, and more transparent for users. In turn, this system helps crypto-asset users and owners to lend and borrow their assets such as tokens or coins in a way that’s easier to understand and clearer to see.

Decentralised finance provides a peer-to-peer environment that’s non-custodial; this, combined with the use of blockchain technology, creates an ecosystem where you’ll be able to settle transactions rapidly. For businesses looking to lean further into the world of crypto, the idea of quicker settlements and more transparency is a huge boost, as it shows that this could be a genuine project that results in the replacement of traditional finance systems.

The key difference between decentralised finance and the traditional systems used for financial management is that there are no central parties managing things – instead, everything is automated using smart contracts, which help to create a safer space with less risk of human error. As a user, you’ll be able to provide your assets to the automated products by lending or providing liquidity, receiving a return on your crypto investment as a result. Due to the presence of the smart contracts, you’ll be able to withdraw any of your assets at any time and use them elsewhere – this freedom is something that’s truly revolutionary and is likely to lead to huge change across the industry, as things become more intertwined and interoperable.

Assets in decentralised finance are controlled and managed by the audit trail that they leave by default in the blockchain that they’re a part of – when an asset is bought and sold, a record is automatically added to the blockchain and this cannot be reversed, which is an example of the simple, yet effective automatic management that DeFi can offer.

As you can probably already see, DeFi is something that’s causing a great deal of conversation due to the huge changes that it could facilitate in a number of different industries, but what exactly will its impact be in the digital asset space? In theory, there are many ways that we can envision DeFi impacting the way that the crypto industry works – here is an overview of the effects that we can see happening over time:

1. Lending and borrowing will become a more viable opportunity – assets that are deposited with certain protocols will be able to earn yields programmatically and could be used as collateral for loans. In most cases, the loans will likely be over-collateralised to account for the volatility of crypto, however, this is a huge step towards normalising crypto for borrowing and lending.
2. Liquidity providing – assets that provide the user with liquidity will be compensated via fees in DeFi, which ensures that you are able to make quick transactions in exchange. This faster process means that some of the biggest pain-points with crypto will be alleviated thanks to decentralised finance.
3. Staking – Your assets will now have the capability to be allocated to secure protocols, which will in turn provide additional staking rewards for the users.

With decentralised finance helping to create so many opportunities for crypto to become more functional and practical in real-world use cases, it’s easy to see why DeFi is regarded as such an important advancement in the industry.

Here at BCB Group, we’re always looking for new ways to enhance our client’s experience when dealing with the crypto markets – we’ve been pioneering in the industry for a number of years and have achieved many feats in that time, notably becoming the first regulated instant settlement network in the European markets, which has allowed clients to complete transactions quicker than they’d have ever thought possible previously. In addition to this, we’re partnered with a variety of forward-thinking entities that are looking to raise standards in the crypto industry, such as CryptoUK – this work helps us to ensure that everyone operating in this industry is able to do so in a way that’s safe, trusted, and secure, protecting clients and institutions alike. If you would like to discuss the opportunities that are presented by becoming a BCB Business Account holder, or you’d like to learn more about our FX or crypto trading services, then get in touch with a member of our friendly, experienced team today. With a wealth of experience in the crypto industry and beyond, our team are able to provide you with the guidance and support that you need to select the best crypto banking partner, trading services, and digital assets custody custodian.