In DeFi, the possibilities of what can be built to replace legacy finance are endless, but there are a few use cases that every newcomer to DeFi will want to know about and explore early on because 1) they’re easy to understand and 2) battle-tested with billions in liquidity and hundreds of thousands of users and 3) easy to use.
First, there’s stablecoins. They are what they sound like: a coin that is stable and, in most cases, pegged to the US dollar. In the future, we’ll see more stablecoins pegged to other fiat currencies, but for now, USD-pegged stablecoins are the standard and today there are billions of stablecoin liquidity on Ethereum!
Stablecoins have been a huge breakthrough in DeFi because they allow users to transfer value with a reliable price point previously unavailable in the volatile cryptocurrency markets.
Next, there’s trading. In DeFi, trading happens on decentralized exchanges (DEXs). A DEX allows buyers and sellers to agree upon a price and exchange assets. Uniswap is one of the most popular DEXs. With DEXs, traders don’t have to trust anyone to hold their assets. Users are always in control of their private keys. There are peer-to-peer exchange, or exchanges where trading happens via pools of tokens, all so that no centralized party has to control an order book.
Lastly, there’s lending and borrowing. When you go to the bank and borrow money, they ask for you to collateralize two things: your home and your reputation! But in DeFi, we don’t have courts to keep borrowers incentivized to follow through with their contract. So we overcollateralize. Borrowers deposit more than the value of what they aim to borrow, and lenders know if borrowers fail to maintain their loan, the DeFi app will auto-sell their collateral to pay back lenders. The aim is to allow borrowers to pay lower interest rates and lenders earn higher interest rates.
So the takeaway here is while DeFi mimics the banking world we all grew up with, it’s really about a new way of transacting peer to peer, with no minimums, no sign-ups, no permission, and no middlemen. Sound radical? That’s the idea.