The Emergence of Traditional Financial Products in DeFi Landscape

Decentralized Finance, i.e., DeFi unbundling the world of traditional finance. It's digitizing the global finance industry and aims to create a “bank-less” society in the future.

That’s right – in DeFi, there are no banks, no intermediaries, and no fees charged by financial intermediaries, just code.

For centuries, financial intermediaries have had control over financial products and processes like borrowing, lending, insurance, and trading.

DeFi companies are built on smart contracts and blockchain technology. They aim to place various financial products and processes in the hands of regular citizens and away from centralized institutions.

The Emergence of DeFi

In 2021, the total value locked (TVL) in the global DeFi ecosystem crossed the $247.5 billion mark. Of course, that figure is still tiny compared to traditional financial markets like global commodities, equities, or derivatives markets. But, the DeFi industry’s growth rate in terms of innovations and the amount of capital it has secured is spectacular.

Here are the top traditional financial products in the DeFi landscape that investors should watch out for-

The DeFi Derivatives Market

Derivatives are financial products. Options, collateralized loans, futures, and prediction markets are all derivatives products. All derivatives derive their worth/value from underlying assets. The underlying assets can be stocks, commodities, bonds or even cryptocurrencies.

By investing in derivatives, investors gain exposure to certain assets without actually having to hold them. How big is the global traditional derivatives market? Its value is 10 times greater than the total global GDP. Some say it’s worth a quadrillion. The DeFi derivatives market is tiny in comparison.

The DeFi derivatives market has the potential to bring low-barrier financial instruments to people across the world. Here are the key players in this promising market-

The total value locked (TVL) of the DeFi derivatives market is still only 3% of the total DeFi market’s TVL. But, the market’s recent growth is highly promising.

DeFi Loans

Crypto applications like Maker and Compound are enabling users to take loans of all sizes without involving any intermediaries. These DeFi lenders typically issue loans in stable coins like USDC. Many lenders even issue loans in currencies like Ethereum (ETH), Basic Attention Token (BAT), or Augur (REP).

In all DeFi lending platforms, cryptocurrencies are used as the underlying collateral to secure the loans. Thanks to smart contracts, users can pass through complex due diligence processes within seconds. They simply need to stake the crypto-assets in their crypto wallets to qualify for DeFi loans.

Maker Protocol (MakerDAO) is currently the leading DeFi lender in this sector. Compound, Dharma, and Nuo Network are also notable mentions. Users can take out collateralized loans from these DeFi lending platforms very easily. Here’s an example of how users take out DeFi loans from the MakerDAO platform-

Once you receive a DeFi loan, you can use it to purchase more crypto assets for margin trading. You can, of course, sell your DAI for USD and use the loan for real-life purposes as well.

DeFi Insurance

Traditional insurance products help people protect themselves from worst-case scenarios. DeFi insurance aims to do the same. In the DeFi world, users face several threats like – hacks, protocol failure, exploitation of smart contracts, etc. Users can protect themselves against these risks by getting DeFi insurance.

As you can see, DeFi insurance has several applications. There are many DeFi insurance providers in the market. The most popular ones include-