Overview of Potential DeFi Use-Cases

Published by Mario Oettler on 16. September 202116. September 2021

Blockchain Introduction Technical – Beginner to Intermediate Lesson 21 – Introduction to Decentralized Finance (DeFi) Overview of Potential DeFi Use-Cases

In this topic, you will get an overview of potential use-cases of DeFi. In further lectures, you will learn more details about selected applications.

Credit – Borrowing & Lending

Imagine you want to buy a stock at stock exchange A for a low price and sell it at the stock exchange B for a higher price. This is known as arbitrage. If you don’t have enough money to buy stock A, you can borrow it from someone. In the real world, applying for a loan, receiving the money, buying a stock and selling it somewhere else, and paying back the loan takes some time.

But with blockchain, this can be done within a single transaction. You can borrow the money, buy a token, transfer it to another exchange, sell it there and pay back the loan. If an intermediate step fails, the whole transaction fails, and all hitherto made steps are reverted. If, for example, the payback of the loan fails due to insufficient funds, the money isn’t borrowed in the first place.

Such an atomic process is only possible with a blockchain. This reduces the risk of credit default.

But borrowing and lending on a blockchain are not restricted to these so-called flash loans. Lenders can accept tokens as collateral and give out coins or other tokens.

Prediction Markets

Prediction markets are bets on the outcome of a future event. They are said to yield good predictions of the outcome. A popular example is the outcome of a presidential election with two candidates, A and B. Traders buy a complete set of shares for the victory of A or B. After the election, the market maker promises to buy the winning share back for 1 Coin. Before the election is finished, traders can buy and sell shares among each other. The price for share A represents the likelihood that candidate A wins the election.

Prediction markets are in some countries considered gambling or fall under speculation regulations. With the emerging blockchain technology, they gained more popularity. Prediction markets are closely connected to blockchain oracles that bring real-world results on the blockchain.

Decentralized Exchanges (DeX)

In decentralized exchanges, assets like coins and token are exchanged. They run on a blockchain and can come in two shapes. The first relies on a blockchain oracle that provides the current market price for an asset pair. The second type calculates the price with a curve (bonding curve or scoring rule).

Insurance

Decentralized insurances promise three things – first, cheaper insurances due to lower administration efforts. Second, faster settlement. Third, collecting funds from the community to finance blockchain-based insurance.

Insurances can focus on off-chain damage events like flight delays or they can cover on-chain events like hacked smart contracts.

Stable Coins and Stable Currencies

As the volatility of cryptocurrencies is very high, users are afraid of using cryptocurrencies for their purchases. Stable coins are crypto assets that have a fixed price. This helps users to mitigate price fluctuations.

There are two general types. First backed stable coins and not backed ones (Seignorage).

There are three types of backed stable coins:

There are fiat-backed stable coins. Here, a third party holds a certain amount of fiat currency. The stable coin price depends on the ratio of fiat currency and the stable coin’s circulating supply.
Cryptocurrency-backed stable coins. The underlying asset is another cryptocurrency.
Commodity-backed stable coins.

In each type, the amount of the backing asset must reflect the amount of the circulating stable coin.