Money has always been borrowed and lent extensively in both economic activity and the economy. Borrowers take loans to accomplish a wide range of purposes, from satisfying primary consumer needs to making investments. Lenders make money available for either a fixed or variable interest rate.
Not just conventional money markets allow for the borrowing and lending of assets. The development of Decentralized Finance (DeFi) allows people to borrow and lend their crypto assets with just a few clicks.
Let’s learn about what is a decentralized money market and what are some of its benefits.
What is a decentralized money market?
A decentralized money market is a market structure that uses several technologies, such as a smart contract, to allow investors, lenders, and borrowers to establish a non-centralized market structure. It is powered by Blockchain technology. They all can trade freely under this market arrangement since no physical market structure has been formed; instead, they employ a range of web3 technologies.
A decentralized money market establishes a network of technological platforms and software that buyers, sellers, and lenders can use to transact, access ask prices, and engage in other market activities.
Decentralized nodes manage the on-chain programmatic code that investors, lenders, and borrowers use to conduct their business, thus breaking the monopoly of a single company in charge and minimizing potential points of failure.
Before we move forward, let’s have a quick overview of the reasons why this money market is widely gaining traction and how it is used:
- Decentralized marketplaces improve communication and confidence between participants of transactions.
- The market system’s accounts are impenetrable and secure.
- It gives investors the option to trade without the presence of a regulatory body, contrary to centralized markets.
- The market structure is favorable for those who have embraced technological advancements.
- The market is perfect for blockchain and crypto trading.
- It provides investors access to and control over their money.
Now, let’s learn about some benefits of the decentralized money market that makes it unique and widely popular.
Benefits of decentralized money market
In a decentralized ecosystem, users are not required to seek permission from a centralized authority before engaging in any money market activity. As a result, anyone can easily borrow money for their requirements online and earn interest on their capital. In addition, the structure of decentralized protocols is inherently censorship-resistant.
Users’ money is held in centralized money markets’ central gatekeeper’s possession. DeFi protocols, like money markets, are non-custodial, and lenders and borrowers have direct control over their funds. At the same time, consumers maintain complete control over their funds, on-chain smart contracts that follow pre-defined logic guarantee that cannot be compromised.
Historically, fractional reserves and under-collateralization have been the norm for centralized financial markets. These marketplaces allow borrowers to withdraw more money than they have deposited as security because of peer pressure to attract new business. Over-collateralization is followed by decentralized money markets, which stabilize the system. Simply put, the smart contract liquidates the collateral of defaulting borrowers.
A design element called composability enables system units to communicate with one another. Different applications and protocols can communicate with each other without requiring permission. DeFi programs can be assembled separately, opening up a world of unique mechanisms like yield extraction and complex derivatives.
What does the future behold for a decentralized money market?
The DeFi protocols have offered consumers a rewarding alternative in a setting where they are cautious of self-serving biases in centralized money markets. The former displays a blockchain-based ecosystem in line with its fundamental decentralized ethos and generally grants governance powers to everyone holding native currency.
Novel projects are now concentrating on altcoins to unlock the value that has been locked there, much like the money markets that previously focused on well-known cryptocurrency projects with large market capitalizations. As a result, it can be predicted that future DeFi money market protocols will likely venture into uncharted territory.
Decentralized money markets serve as an essential foundation upon which the DeFi ecosystem’s advanced financial solutions can be constructed. Even if borrowing and lending are effective on their own, they are even more effective when combined with other DeFi “money legos” to produce a more effective whole than the sum of its parts. In addition to expanding in liquidity and offering more opportunities and services to more users, these money markets will grow in size and be at the forefront of DeFi innovation as yields in the real-world economy become more unpredictable. Decentralized money markets definitely have a more promising future than ever.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn’t represent any investment advice or WazirX’s official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.