DeFi: Bridging Fiat Currencies to the Financial Foundation Cryptocurrency

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Decentralized finance (DFI) is an umbrella term for financial products (lending, trading, savings, etc.) that do not require a centralized institution such as a bank or exchange broker. Instead, they run on smart contracts, which execute automatically when certain conditions are met. Users transact directly with each other and maintain control over their assets.

The first DeFi apps appeared around 2017, but it was in 2020-2021 that the market really exploded, reaching a valuation of $100B. Apps like Compound, Curve and Uniswap manage billions in volume.

Nevertheless, the DeFi industry is facing some formidable challenges. Perhaps the biggest connecting is fiat (traditional currencies, such as USD) and crypto. The general consensus is that DeFi can and should foster the coexistence of both fiat and crypto – but how? This guide explores the most promising solutions.

Providing bank loan services for both crypto and fiat

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DeFi can generate a synergy of crypto and fiat by integrating traditional currencies into decentralized financial products. After all, for as long as there has been a global economy, fiat-based banking systems have been the lifeblood of the global economy. Banking services like easy lending contribute greatly to the stability of the financial sector globally and for citizens who depend on credit in their daily lives.

DeFi can unite the crypto and fiat worlds by providing similar lending and banking services using both types of currencies. Examples include Compound, MELD and Ave. Most of these platforms also offer loans in crypto and fiat, backed by an existing cryptocurrency stake or Converse. By doing so, DeFi network cryptocurrency holders can have faster access to standard fiat assets without losing or reducing their existing crypto holdings.

Already, there are several DeFi networks that offer lending services using both fiat and crypto. Providing cash loans using crypto as collateral is a good way to promote this type of old and new currency coexistence.

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Allow fiat support in stable coins

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Another promising way to allow crypto and DeFi to coexist is by leveraging the concept of stablecoins. Stablecoins are simply a class of crypto assets backed by another asset such as gold, commodities or fiat currencies such as the US dollar.

However, it is important that more upcoming DeFi projects provide similar stablecoin services to allow the coexistence of both crypto and fiat in the financial sector. As stablecoins grow, their users are increasingly adopting crypto as well.

Lending Fiat Liquidity

Another way for DeFi projects to help ensure the coexistence between crypto and fiat is by allowing fiat liquidity pools. A legal liquidity provider provides their legal assets to a lending pool – their legal assets are used to make loans to other people.

One of the existing platforms providing fiat liquidity options is the MELD protocol. The network will allow investors and institutions to provide fiat liquidity using the MELD app on mobile, desktop or web. In the process, investors will earn returns at a higher APY. On top of lending legal liquidity, this platform will allow investors to access their line of credit, thus making crypto assets even more liquid.

Allow investors to earn income with fiat and crypto

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Savings accounts are one of the most popular banking products, although falling interest rates and rising inflation mean that the real return on such accounts is zero or sub-zero. DeFi projects offer similar savings products but provide higher income. DeFi yield farming is a classic example: users lock in crypto tokens and are rewarded with more tokens daily, with nominal APY often above 100%.

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

When lending cash, DeFi projects often create a liquidity pool to deposit cash, then the cash is offered to other people who in turn collateralize the crypto. However, in this case, individuals making fiat deposits will earn rewards in interest after loan repayment.

The increasing ease of exchanging crypto and fiat

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Providing better liquidity of crypto tokens is another way for the DeFi space to coexist with both crypto and fiat. Already, today there are many crypto exchanges that provide liquidity for assets – however, with most of them it takes a lot of time to convert tokens back into cash. They are not highly liquid by default.

However, DeFi projects can help streamline the problem. There are many ways in which this can be accomplished.

Expert Ken Oling noted several options: “One is to provide the option of buying crypto directly with bank accounts or other fiat options. For example, decentralized exchange platforms can make it easier for investors to buy crypto using credit cards.” By doing this, it will be easier to convert fiat to crypto.

Second, DeFi projects can provide instant cash access for those holding DeFi assets. Lending platforms can offer crypto investors a line of credit. In addition, DeFi projects can be linked to banking institutions and other money changers. The result will provide greater ease of exchanging crypto to fiat and vice versa.”

last word

This guide is exploring how DeFi can allow crypto and fiat to coexist. There is an extreme need to ensure a good link between fiat and crypto for the two to coexist. DeFi is already playing a major role in linking fiat and crypto-assets.

The DeFi network provides essential services such as lending and produce farming, all of which can provide a turning point. In lending, DeFi projects allow people to access fiat loans using crypto as collateral. By doing so, they provide investors with a pool to provide fiat liquidity. There is no doubt that DeFi is a powerful new tool in the financial market to bring more money to more people in a safe, liquid and disruptive fashion.