3 ‘Weird’ DeFi Use Cases That Give Real Benefits to Users

  • Critics say DeFi is just a way to offer unregulated financial services
  • However, DeFi’s scalability offers several unique use case
  • More use cases will likely emerge in the near future

Decentralized finance (DeFi) is one of the bigger segments in the blockchain and Web3 industries. The nascent industry promises to build a financial system around an open, permissionless system using the blockchain.

As a result of this, DeFi has seen rapid growth over the past few years with hundreds of protocols being launched and used by users for various financial activities.

However, many DeFi projects have mostly rehashed the same offerings from traditional finance. Some of these projects seem to focus on offering the same products but outside the purview of banking regulations.

For that reason, many have called DeFi simply a new form of crypto-enabled TradFi. Hilary J. Allen, a law professor at the American University Washington College, calls DeFi the new version of “shadow banking.”

The term refers to financial institutions and practices that fall outside banking regulations. Its earlier instances include derivatives, securitizations, and money market mutual funds. These same unregulated contracts were a significant factor in the 2008 crisis. For that reason, Allen believes that DeFi poses significant risks to both its users and the financial system.

However, DeFi has many proponents, some of whom are investing heavily in the space. Investment firm Andressen Horowitz (a16z) is among the greatest supporters of Web3 and decentralized tech.

A16z believes that DeFi holds the promise to the 1.7 billion unbanked people around the globe. The technology provides many use cases that are unique to DeFi, A16 believes.

“Weird DeFi”

Decentralized blockchain protocols could unlock great opportunities in the space and go far beyond a rehashing of TradFi. There are numerous projects that offer unique possibilities for users.

The DeFi space is full of innovative protocols that offer users many benefits. From yield farming to automated market making, there are plenty of projects that are pushing the boundaries of what DeFi can do.

While some of these projects may appear strange and complex, they all provide tangible benefits to users. Because of their unconventional nature, these protocols seem “weird” from the standpoint of traditional finance.

Here are three ‘weird’ DeFi protocols that are pushing the boundaries of financial services and offering real benefits to users.

Crypto Credit Ratings

Traditional credit rating companies fail to provide reliable information about how they operate. This leads them to seem less trustworthy and difficult to use for users. 

ARCx is a project that seeks to change this by using DeFi. It is a decentralized financial protocol that offers users a credit rating and score based on on-chain data about their crypto wallets. 

Users can use ARCx to generate a personal credit score using their wallet addresses and transaction data. This data is used to create an individual credit score that can be used by other protocols and applications in the DeFi space.

For example, users can use their ARCx score to identify which lending protocol they are eligible for or the amount of collateral they need to put up for a loan. As such, ARCx provides a secure and reliable way for lenders, borrowers, and other users to interact with one another within the DeFi space.

Moreover, its solution also addresses the needs of a globalized lending marketplace. There is a growing need for credit at an international level,  and ARCx provides a solution for it.

‘Self-Repaying Loans’

Automated loan repayment is probably not the first thing most people consider when considering DeFi. However, projects like Alchemix offer a unique use case for the space – self-repaying loans.

Alchemix is a DeFi protocol that offers a unique way to participate in the token economy with minimal risk. Using Alchemix, users can borrow DAI (a decentralized stablecoin) against their crypto assets.

The loan is linked directly to the performance of the underlying assets, ensuring that for traders and investors, liquidation is never an issue. Furthermore, Alchemix has integrated incentives and insurance layers into their automated loan system that helps protect lenders from losses when tokens depreciate below a certain value.

While this product is currently geared towards traders, solutions like these could also reach the consumer market. The scalability of DeFi solutions could make better lending terms, and more advantageous payment schedules accessible to everyone.

Boosting Liquidity With Staking Rewards

Liquidity providers typically act as a bridge between buyers and sellers of a particular asset. They facilitate transactions by creating both buy and sell orders in the market, providing liquidity to buyers and sellers alike.

With DeFi protocols, however, this function can be taken up by anyone in the network. This is made possible through automated Market Maker protocols, which reliably provide liquidity to the DeFi ecosystem with no requirement for user intervention.

As opposed to traditional models, these Maker protocols operate without a central authority or intermediary and offer users increased efficiency and autonomy when it comes to exchanging digital assets.

Moreover, DeFi protocols offer additional benefits to users. One of the first innovators in the space was Yearn Finance. The platform features robo-advisor helping users find the liquidity pools with the best yields. Since its inception, multiple projects have joined the yield-optimization game.

Convex Finance is a cutting-edge DeFi platform that elevates the staking rewards experience on Curve Finance. Convex Finance offers boosted rewards even if users hold a fraction of tokens, as it allocates rewards proportionally to deposits.

At the same time, Aura Finance helps users get the best yields of BAL tokens on Balancer, an Ethereum-based self-balancing index. Aura Finance seeks to innovate the traditional DeFi market by making user harvesting even simpler and more efficient.

Through the built-in portfolio manager, the entire process is automated, so users don’t have to worry about manual trades or constantly monitoring markets—allowing them to focus on other aspects of their investment experience.

Moreover, it helps users maximize their voting power through the veBAL’s time-weighted voting system. In Balancer, tokens that are locked up for longer get more weight for voting. Moreover, Aura uses its collective voting power to choose which liquidity pools should get the most BAL rewards.

From self-repaying loans to staking rewards, DeFi protocols provide users with a wide array of options for participating in the new economy. As the space continues to evolve, more innovative financial solutions are likely to emerge.

On the Flipside

  • Despite its potential, DeFi still comes with unique risks. As the sector is still relatively new, it holds substantial risk. Multiple DeFi protocols have suffered from hacks and exploits by malicious actors.

Why You Should Care

DeFi is a growing sector of the crypto industry and one that is driving institutional interest in the space.

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Author
David Marsanic

David Marsanic is a business journalist specializing in tech and crypto. He focuses on institutional investors, venture capital and the intersection between DeFi and tradFi. He wants to help retail investors understand how major financial institutions impact the crypto space. He has been active in blockchain and crypto since 2020 and believes that there is huge potential in decentralized tech and finance.