the financial foundation that unites fiat currencies with cryptocurrencies

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the financial foundation that unites fiat currencies with cryptocurrencies

This article was translated from our English edition using AI technologies. Errors may exist due to this process. The opinions expressed by the collaborators of Entrepreneur they are personal.

Decentralized Finance (DeFi) is an umbrella term for financial products (loans, trading, savings, etc.) that do not require a centralized institution like a bank or broker-dealer. Instead, they run on smart contracts, which are automatically executed when certain conditions are met. Users transact directly with each other and maintain control over 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.

However, the DeFi industry is facing some formidable challenges. Perhaps the biggest 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 lending services for both crypto and fiat

Related: Decentralized finance is on the rise. What you need to know in 2021

DeFi can create a synergy of crypto and fiat by integrating traditional currencies into decentralized finance products. After all, fiat-based banking systems have been the lifeblood 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 global financial sector and to the citizens who depend on loans in their daily lives.

DeFi can bridge the crypto and fiat worlds by providing similar banking and lending services using BOTH types of currencies together. Examples include Compound, MELD, and Aave. Most of these platforms offer both crypto and fiat loans, backed by an existing crypto holding, or the other way around. By doing this, crypto holders of a DeFi network have faster access to standard fiat assets without losing or diluting their existing crypto holding.

There are already multiple DeFi networks that provide lending services using both fiat and crypto money. Offering cash loans using cryptocurrencies as collateral is a good way to encourage this kind of coexistence of old and new currencies.

Allow fiat backing in stablecoins

Related: The road to stability: how stablecoins can drive borderless business across Europe

Another promising way to enable cryptocurrencies and DeFi to co-exist is to leverage the concept of stablecoins. Stablecoins are simply a class of crypto assets that are backed by another asset like gold, commodities, or fiat currencies like the US dollar.

However, it is vital that upcoming DeFi projects provide similar stablecoin services to enable the coexistence of cryptocurrencies and fiat money in the financial sector. As stablecoins rise, so will their users, resulting in faster crypto adoption.

Fiat Liquidity Loan

Another way DeFi projects can help ensure coexistence between cryptocurrencies and fiat currency is by enabling fiat liquidity pools. A fiat liquidity provider offers its fiat assets to a lending pool: its fiat assets are then used to make loans to other people.

One of the existing platforms that offers fiat liquidity options is the MELD Protocol. The network will enable investors and institutions to offer fiat liquidity by using the MELD app on mobile, desktop or web. In the process, investors will earn high APY returns. In addition to lending fiat liquidity, this platform will also allow investors to use their line of credit, making crypto assets even more liquid.

Allow investors to earn income with Fiat and Crypto

Related: Build new wealth bypassing old money

Savings accounts remain one of the most popular banking products, although falling interest rates and rising inflation mean real returns on such accounts are zero or even less than zero. DeFi projects offer similar savings products but provide higher returns. DeFi yield farming is a prime example: users lock up crypto tokens and are rewarded with more tokens daily, with nominal APYs often exceeding 100%.

DeFi projects often require other investors to deposit their assets into a liquidity pool (equivalent to a savings account). The asset is then loaned to someone else who offers another asset as collateral.

By lending cash, DeFi projects will often create a liquidity pool to deposit cash, and the cash will be offered to others who collateralize cryptocurrencies in return. However, in this case, people who deposit fiat will earn interest rewards after loan repayment.

Increased ease of exchanging cryptocurrencies and fiat

Related: Here’s how you can leverage DeFi to maximize profitability

Providing better liquidity of crypto tokens is another way the Defi space co-exists with both crypto and fiat. There are already many cryptocurrency exchanges today that offer liquidity for assets; however, it takes a long time to convert the tokens back to cash with most of them. They are not highly liquid by default.

However, DeFi projects can help simplify the problem. There are many ways through which this can be achieved.

Expert Ken Olling pointed out several options: “One is to provide the option to buy crypto directly with bank accounts or other fiat options. Decentralized exchanges, for example, can make it easier for investors to purchase cryptocurrencies with credit cards. By doing that, it will be easier to convert fiat to crypto.

Second, DeFi projects can provide instant access to cash for those who own DeFi assets. Lending platforms can give crypto investors a line of credit. Also, Defi projects can be linked with banking institutions and other money changers. The result will provide more ease for exchanging crypto to fiat currency and vice versa.”

last word

This guide has been exploring how DeFi can provide coexistence between crypto and fiat. There is a great need to ensure a good link between fiat and crypto for the two to co-exist. DeFi has already played a significant 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 cryptocurrencies as collateral. In doing so, they provide a pool for investors to offer fiat liquidity. There is no doubt that DeFi is a new and powerful tool in the financial market to bring more money to more people in a safe, liquid and disruptive way.

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