What are decentralized finance services?
Decentralized finance services are the new financial paradigms that manage financial transactions using cryptocurrencies and blockchain technology. The objective of the technology is to democratize finance by substituting traditional centralized intermediaries with peer-to-peer relationships to support a wide range of financial services, including banking, mortgages, loans, and asset trading.
While these services offer many benefits, including decentralization, transparency, and accessibility, they also have limitations, particularly in terms of scalability, interoperability, and the ability to access assets from other blockchain networks. So, is there a solution to these limitations? Yes! it is Cross-Chain Decentralized Finance Service that aims to overcome these limitations by allowing users to access and transact with assets from different blockchain networks.
What are cross-chain decentralized finance services?
The Cross-Chain decentralized finance services allow two different blockchains to communicate with each other and exchange resources. This improves the interoperability between the blockchains and enables the development of various use cases for different industries.
Earlier, the blockchain ecosystem was being overlooked by several industries due to the restricted nature of the interaction between two-native blockchain networks. Now, decentralized finance services powered by cross-chain technology are beginning to gain wide acceptance.
How does cross-chain power decentralized finance services?
The following table describes how the cross-chain makes decentralized finance services more efficient and powerful:
Working of the cross-chain decentralized finance services:
Cross-Chain decentralized finance services usually include burning or locking cryptocurrencies on the original chain via smart contracts and minting or unlocking the cryptocurrencies on the new chain.
The prime example is Wrapped Bitcoin (ERC-20 token), collateralized by utilizing Bitcoin. If the trader wants to receive an ERC-20 token on the Ethereum network, Bitcoin should first be locked on the Bitcoin network and, subsequently, be produced on the Ethereum network utilizing the cross-chain.
The Cross-Chain applications are of the following types:
- Burn and mint – The trader burns cryptocurrencies on the original chain before minting them on the destination chain.
- Lock and mint – The trader locks cryptocurrencies in the smart contract on one blockchain, while wrapped tokens are produced as an IOU (I owe you) token on the other chain. Wrapped tokens on the destination chain are similarly burned in order to unlock the original cryptocurrency on the first chain.
- Lock and unlock – The trader locks cryptocurrencies on the original chain before unlocking them in the liquidity pool on the destination chain.
Different types of cross-chain decentralized finance services:
- Decentralized Finance Lending Platform – It helps users manage their cryptocurrencies and earn interest across several chains by providing them with credits. Traders access and communicate with distinct lending platforms and then lend loans to traders to earn profit.
- Decentralized Finance Staking Platform – It enables users to benefit from their crypto assets by locking a certain amount of the platform’s native token. Also, these platforms allow traders to become a validator in any Proof-of-Stake blockchain platform.
- Decentralized Finance Exchange Platform – It allows users to lend/borrow a wide range of cryptocurrencies across various DeFi platforms. By employing these platforms, users can optimize their earnings by borrowing or earning interest while performing their duties as validators.
- DAO-Enabled Cross-Chain Decentralized Finance Platform – The DAO (Decentralized Autonomous Organization) is the organization that establishes laws and facilitates autonomy among the various firms launching and administering the DeFi platform. The traders can stake, trade, or invest in these platforms without the fear of being controlled by a centralized organization.
Top blockchain protocols supporting cross-chain decentralized finance services:
- Polkadot – It is an interoperable blockchain network that utilizes a substrate framework, an interoperable bridge, and parachains to make its operations interoperable. The DeFi solutions developed on the Polkadot blockchain can interact with different blockchain ecosystems, such as Ethereum, via Polkadot bridges.
- XDC Network – It is an X DPoS-enabled organization that provides hybrid blockchains with interoperable features, such as smart contracts, for global trade and financial purposes.
- Avalanche – It is a highly reliable and scalable ecosystem that builds innovative cross-chain decentralized finance solutions. In response to the growing need for cross-chain DeFi applications, Avalanche’s platforms are capable of interacting with both non-interoperable and interoperable DeFi platforms.
- Near Protocol – It is the blockchain-based decentralized application platform that develops DeFi solutions. It has launched the Rainbow Bridge to facilitate interaction across various DeFi ecosystems and enable interoperability with solutions, such as Ethereum.
Conclusion:
Cross-chain decentralized finance services are revolutionizing the DeFi space. It offers notable value-based advantages for interoperability between distinct blockchain networks. Furthermore, blockchain-agnostic solutions will be a catalyst for widespread DeFi adoption through interoperability.
PrimaFelicitas is a top-notch Decentralized Finance Services Company that helps businesses develop and deploy trustless and highly secure cross-chain DeFi applications and unlock new interoperable use cases.
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Last modified on June 26th, 2023 at 12:38 pm
