DeFi Use Cases - Exploring the Potential

Decentralized Finance (DeFi) is an umbrella term for various protocols and financial instruments that are built on distributed ledger technology (DLT), such as blockchain. DeFi is transforming the way financial systems operate, offering open, transparent, and permissionless alternatives to traditional finance. Built on blockchain technology, DeFi removes intermediaries, allowing users to interact with financial services directly through decentralized applications (dApps).

But what exactly is DeFi used for, and how is it reshaping industries? Let’s explore the key DeFi use cases that are driving the future of finance.

What is DeFi Used For?

DeFi is revolutionizing various sectors by creating new opportunities for borrowing, lending, trading, and investing—without relying on banks or traditional institutions. The DeFi ecosystem is already enabling instant and permissionless access to financial services, requiring only an internet connection and a crypto wallet.

Whether it’s programmable financial transactions that automate processes with greater security and efficiency, or interoperable platforms that ensure seamless movement of digital assets across different protocols, progress has been swift.

Key DeFi Use Cases

Borrowing & Lending

One of the most widely used applications of DeFi protocols is decentralized lending and borrowing. Unlike traditional finance, where banks determine interest rates and creditworthiness, DeFi enables users to borrow funds instantly, using crypto assets as collateral.

Users enjoy the ability to lend digital assets and earn interest without involving intermediaries. For lenders, the use of over-collateralized loans provides security, adding an extra layer of protection for lenders and minimizing their risk in case of default.

The upcoming XRP Ledger native lending protocol will see these opportunities come to fruition for users. The XLS-66d specification would introduce the XRP Ledger-native Lending Protocol, which facilitates straightforward, on-chain, uncollateralized fixed-term loans with pre-set interest terms. Loan liquidity is sourced from pooled funds, while the design relies on off-chain underwriting and risk management to assess borrowers’ creditworthiness. In cases of loan default, the First-Loss Capital protection scheme absorbs a portion of losses to protect Vault Depositors.

The Lending Protocol is represented on the ledger by a LoanBroker entry created, owned, and managed by the same account as the VaultOwner. Future updates may allow for greater independence and flexibility by decoupling Vault and Lending Protocol components.

Yield Farming

Yield farming, or liquidity farming, is a DeFi strategy where cryptocurrency holders earn passive income by providing liquidity to DeFi protocols. Users lock up their assets in liquidity pools, forming trading pairs, and receive liquidity provider (LP) tokens in return. These LP tokens can be staked or deposited into other protocols to earn additional rewards such as transaction fees and governance tokens. Yield farming carries risks, including impermanent loss and smart contract vulnerabilities, requiring participants to conduct thorough research before engaging in this potentially lucrative but risky activity.

Established protocols like Yearn.Finance, Balancer, and Curve optimize yield farming strategies for users seeking returns. More is already on the way for the XRPL too! The lending portion of the earlier mentioned XRPL-native Lending Protocol spec is built on top of another specification, which brings a single asset vault to the XRP Ledger. This will unlock further use cases beyond lending in the future - such as yield farming, escrow, and more!

Decentralized Exchanges (DEXs)

Decentralized exchanges (DEXs) allow users to trade cryptocurrencies directly from their wallets, eliminating the need for centralized intermediaries. DEXs ensure greater security, as users retain control of their private keys. DEXs tend to incur lower fees compared to traditional exchanges, and importantly allow for global accessibility, enabling users to trade 24/7 with only an internet connection.

Leading decentralized exchanges (DEXs) rely on automated market makers (AMMs) to provide liquidity and enable frictionless trading. Uniswap, for example, pioneered the AMM model, allowing users to swap tokens without relying on traditional order books. Curve Finance specializes in stablecoin and pegged asset trading by optimizing for low slippage, while Balancer enables custom liquidity pool structures with multiple assets. SushiSwap, another popular AMM, has expanded its offerings to include lending, yield farming, and cross-chain swaps. XRPL’s AMM, however, takes a different approach by introducing protocol-level liquidity for tokenized assets, stablecoins, and real-world assets (RWAs).

Unlike traditional AMMs, XRPL’s version integrates directly with its native order book (CLOB)-based DEX, leveraging both models to optimize trade execution. This hybrid system determines whether swapping within a liquidity pool, through the order book, or both provides the best rate and executes accordingly. Additionally, its continuous auction mechanism mitigates impermanent loss, making liquidity provision more appealing to institutional players and market makers.

Stablecoins & Payments

A stablecoin is a type of digital asset designed to maintain a stable value by pegging its worth to a reserve asset, such as a fiat currency like the U.S. dollar, a commodity like gold, or a basket of assets. This stability addresses the volatility often found in other cryptocurrencies, making stablecoins especially suitable for everyday transactions and financial services.

Stablecoins play a crucial role in payments, remittances, decentralized finance (DeFi), and cross-border payment solutions. Their stable value ensures that users can transfer funds without the risk of significant value fluctuations during the transaction, which is essential for both consumers and businesses.

Ripple envisions a future where regulated, enterprise-grade stablecoins, such as Ripple USD, are integral to the broader financial ecosystem. Ripple introduced RLUSD to provide an institutional-grade, fully regulated stablecoin that seamlessly integrates with XRPL and Ethereum Networks. RLUSD is designed to provide the trust and utility required for institutional adoption, ensuring compliance with regulatory standards while offering the benefits of digital assets.

Tokenization of Real-World Assets (RWAs)

RWA tokenization is the process of converting ownership rights into digital tokens on a blockchain. Blockchain technology provides a solution by digitizing RWAs into tradeable tokens, allowing them to be securely recorded and transferred onchain. This process enhances liquidity, transparency, and accessibility while being aware of compliance and security.

The DeFi space is extending beyond crypto into real-world assets (RWAs), enabling the fractionalization and tokenization of traditional assets such as treasuries, money market funds, real estate and stocks and bonds.

Creating a token on the XRPL is incredibly simple. Tokens are immediately available for trading on its decentralized exchange (DEX) and there is no need for specialized programming languages or complex smart contracts. The built-in DEX and auto-bridging feature simplify onchain trading, and transactions settle in 3–5 seconds at fractions of a cent.

There has already been encouraging movement with tokenized treasuries and money market funds, which are quickly gaining traction, as evidenced by Archax’s use of the XRPL to tokenize part of abrdn’s £3.8 billion US Dollar Liquidity Fund (Lux). These low-risk investment vehicles show promise for higher yields than stablecoins, allowing investors to maximize returns while minimizing risk in their portfolios.

Cross-Border Transactions & Remittances

DeFi enables fast, low-cost, and borderless payments, making it an ideal use case for remittances. Trillions of dollars in payments are sent across borders every year. Yet, the traditional mechanisms supporting these transactions remain slow, expensive, and prone to failure. New, emerging solutions are leveraging the power of blockchain to overcome the limitations of these conventional payment systems—powered by DeFi technology.

Blockchain payment transactions are immutable in nature, meaning that once a transaction is recorded, it cannot be altered or deleted. This makes it impossible for malicious actors to tamper with transaction data recorded on the XRP Ledger — and ensures that the information is accurate, enhancing overall data security and integrity.

The Future of DeFi

As blockchain technology continues to evolve, DeFi protocols are unlocking new opportunities for financial inclusion, efficiency, and security. However, challenges such as regulatory compliance, scalability, and security risks must be addressed for mass adoption.

By integrating DeFi use cases into mainstream financial systems, the industry is moving toward a more open and decentralized financial future. Whether it’s yield farming, tokenizing assets, or transforming lending and payments, DeFi is redefining global finance.

Want to learn more? Explore how decentralized finance (DeFi) is shaping the next generation of financial services on the XRPL Learning Portal!