The financial foundation that connects fiat currencies with cryptocurrencies

By Sydney Barrett Last updated Apr 23, 2022

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Decentralized Finance (DeFi) is an umbrella term for financial products (loans, trading, savings, etc.) that do not require a central institution such as a bank or stockbroker. Instead, they run on smart contracts that run automatically when certain conditions are met. Users trade directly with each other and remain in control of their assets.

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

Still, the DeFi industry faces some formidable challenges. Perhaps the biggest is the connection between fiat (traditional currencies like USD) and crypto. The general consensus is that DeFi can and should encourage fiat and crypto coexistence – but how? This guide examines the most promising solutions.

Providing Bank Lending Services for Crypto and Fiat

Related: Decentralized finance is on the rise. What you need to know in 2021

DeFi can generate a synergy of crypto and fiat by integrating traditional currencies with decentralized finance products. After all, fiat-based banking systems have been the lifeblood of the global economy for as long as there has been a global economy. Banking services such as easy lending make a significant contribution to the sustainability of the global financial sector and to the citizens who depend on credit in their daily lives.

DeFi can unite the crypto and fiat worlds by offering similar lending and banking services using both types of currencies at the same time. Examples are Compound, MELD, and Aave. Most of these platforms offer loans in crypto and also in fiat backed by an existing cryptocurrency holding, or vice versa. This allows crypto holders on a DeFi network to gain faster access to standard fiat assets without losing or diluting their existing crypto stakes.

There are already several DeFi networks offering lending services using both fiat and crypto. Offering cash advances using crypto as collateral is a good way to encourage this kind of coexistence of old and new currencies.

The story goes on

Allow fiat backing in stablecoins

See also: The Road to Stability: How Stablecoins Can Drive Borderless Business Across Europe

Another promising way to enable 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 like the US dollar.

However, it is crucial that other upcoming DeFi projects offer similar stablecoin services to enable crypto and fiat coexistence in the financial sector. As stablecoins increase, so will their users, leading to faster adoption of crypto.

Lend liquidity to Fiat

Another way for DeFi projects to ensure coexistence between crypto and fiat is to allow fiat liquidity pools. A fiat liquidity provider offers their fiat assets to a loan pool – their fiat assets are then used to lend to other people.

One of the existing platforms offering fiat liquidity options is the MELD protocol. The network will allow investors and institutions to offer fiat liquidity using the MELD app on mobile, desktop or web. Investors earn returns in high APYs. In addition to lending fiat liquidity, this platform will also allow investors to use their line of credit, making crypto assets even more liquid.

Enable investors to earn income from fiat and crypto

Also see: Build new fortune by bypassing old money

Savings accounts remain one of the most popular banking products, although falling interest rates and rising inflation mean real returns on such accounts are zero or even sub-zero. DeFi projects offer similar savings products but bring higher returns. DeFi yield farming is a prime example: users lock up crypto tokens and are rewarded with more tokens daily, with nominal APYs often exceeding 100%.

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

When lending cash, DeFi projects often create a liquidity pool for depositing cash, with the cash then being offered to others who in turn collateralize crypto. In this case, however, the people who deposit fiat will earn interest after the loan is repaid.

Increasing ease of exchanging crypto and fiat

Related: How to Leverage DeFi to Maximize Profitability

Providing better crypto token liquidity is another way for the defi space to coexist with both crypto and fiat. Already today, many crypto exchanges offer liquidity for assets – however, most of them take a very long time to convert the tokens back into cash. They are not highly liquid by default.

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

Expert Ken Olling noted several options: “One is to buy crypto directly using bank accounts or other fiat options. For example, decentralized exchange platforms can make it easy for investors to buy crypto with a credit card. This way it will be easy to convert fiat to crypto.

Second, DeFi projects can provide instant access to cash for those who own DeFi assets. The lending platforms can provide a line of credit to crypto investors. In addition, Defi projects can connect to banking institutions and other money changers. The result will make it easier to exchange crypto for fiat and vice versa.”

Last word

This guide explored how DeFi can enable coexistence between crypto and fiat. There is a high need to ensure a good connection between fiat and crypto so that the two can coexist. DeFi is already playing a major role in linking fiat and crypto assets.

DeFi networks provide basic services like lending and yield farming, all of which can accommodate fiat. In lending, DeFi projects allow people to access fiat loans by using crypto as collateral. In this way, they offer investors a pool to offer fiat liquidity. There is no question that DeFi is a powerful new tool in the financial market to bring more money to more people in a safe, liquid and disruptive way.

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