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DeFi, stablecoins and mainstream adoption, ET CIO
Raj Karkara, COO, ZebPayCryptocurrency has changed the rules of the game in modern finance, transforming the way financial transactions are perceived and conducted. As it moves from being a technical tool and digital asset to the financial mainstream, it can potentially lead to financial inclusion and empower those excluded from formal financial services.
Several key pillars in the cryptocurrency universe are helping to bring about this shift, including the rise of decentralized finance (DeFi), stablecoin platforms and the use of cryptographic tokens for peer-to-peer transactions.
The Disruption of DeFi
Decentralized finance (DeFi) platforms can improve the accessibility, transparency and efficiency of financial services. By leveraging Blockchain tech, DeFi platforms can provide multiple financial services such as lending, borrowing, and remittances. They can democratize finance and provide opportunities for individuals to be part of an inclusive and transparent financial system.
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Fundamentally, DeFi is a peer-to-peer network enabled by smart contracts that automate transactions. These contracts reduce costs, simplify processes and eliminate the need for intermediaries. Smart contracts offer the opportunity to access various financial services to anyone with an Internet connection, regardless of their geographic location or socioeconomic situation.
DeFi uses blockchain, a secure and immutable ledger technology where transactions are recorded and verified through many automated processes. This means that transactions can be tracked and verified by anyone. Furthermore, DeFi platforms offer multiple options to meet different user needs with their decentralized nature, ensuring users have greater control over their assets.
By efficiently ensuring the reach of financial services to the underserved population, DeFi can bridge the gap between the banked and the unbanked. Through DeFi platforms, individuals 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 boosted the use cases for cryptocurrencies. At a fundamental level, stablecoins are digital assets that are backed by stable real-world assets such as fiat currencies or commodities and act as a bridge between cryptocurrencies and the stability offered by traditional fiat currencies. Cryptocurrencies offer fast transactions on the blockchain and combined with the stability of fiat currencies will be a game changer. On the other hand, stablecoins mitigate price fluctuations and provide a reliable exchange rate that creates trust and security. Stablecoins are designed to mimic the price stability of fiat currencies such as the US dollar, euro, and others.
By linking their value to these assets, stablecoins offer users the benefits of stability and blockchain efficiency. For every stablecoin unit in circulation, an equivalent amount of reserve assets is stored, providing a direct peg. Meanwhile, crypto-collateralized stablecoins are collateralized using a pool of other crypto assets rather than fiat currencies. Smart contracts and algorithms regulate the ratio and keep it stable.
Algorithmic stablecoins are based 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 in some cases can be used to send money to family and friends or, in some cases, to make online payments globally.
This system is transparent and open to audit, allowing users to independently verify transactions and collateral, playing a key role in wider adoption.
Getting Financial Inclusion Right
The ability to break down walls and make financial products available to everyone at the click of a button is a key advantage.
By offering tools for transparent and secure transactions, cryptocurrencies can ensure that unbanked individuals can participate in the global financial system on their own terms. From migrant workers sending remittances home to entrepreneurs seeking capital for their businesses, cryptocurrencies can make it easier and more efficient to dismantle barriers and help create an inclusive and equitable financial landscape.
In areas with limited access to financial services, cryptocurrencies offer a secure platform for storing and transferring money via a wallet. Crypto transfers are fast and can only be completed with 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.
Cryptocurrencies simplify cross-border transactions by eliminating high fees and long processing times and facilitating borderless transactions with minimal costs, enabling seamless money transfers globally.
Cryptocurrencies offer access to essential financial services, such as credit savings accounts, via decentralized applications (DApps). They can help the insurance industry reduce cases of fraud and increase transparency. Using blockchain’s immutable ledger, insurance companies can detect fraudulent claims, while smart contracts can automate underwriting processes. Some cryptocurrency companies often allow users to earn interest on their cryptocurrency holdings or borrow money.
There is no doubt that cryptocurrencies are going mainstream, fueled by DeFi, stablecoins, and major macroeconomic transformations. They are changing everyday transactions, democratizing access to financial services, and reshaping the global economy. Government, regulators, and cryptocurrency companies must work in tandem and ensure that regulation helps cryptocurrency usage spread. By fostering collaboration, innovation, and responsible stewardship, we can harness the full potential of cryptocurrencies and chart a course toward a more inclusive and prosperous future.
Disclaimer: The opinions expressed are solely 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 Jun 28, 2024 at 16:08 IST
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