Understanding decentralized money markets – the Bitcoin’s role

There are centralized money markets and decentralized money markets. Thus, a decentralized money market operates without a central legal authority or financial institution. So the decentralized money market allows only the original user of an account to withdraw money deposited by lenders and borrowers. In addition, a healthy economy should be able to put idle capital to work, allowing people to borrow money to grow their businesses and pay for their expenses. Also, a healthy economy should allow others to borrow their financial assets and make profit to increase their savings. To know more about Bitcoin, you can go to this website The Bitcoin System.

In simplest terms, a money market is a platform that connects borrowers and lenders seamlessly. Over time, these currency markets have changed. However, the goals have remained the same over time. Borrowers use the money market to access a short-term loan to their preferred borrower while putting up another currency or asset as collateral. This guarantee is essential if the borrower is the first to repay the debts. Eventually, if the borrower fails to pay the debt again, the collateral is sold to repay the lenders dues. However, the borrower can get the guarantee if they meet the obligation and pay.

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In addition, borrowers pay a fee in the form of an annual interest rate for them to borrow working capital from lenders. The interest rate is a function of supply and demand to ensure sufficient liquidity is available to borrowers and lenders.

However, with the rise of decentralized finance, decentralized currency markets allow users to access, borrow, and lend Bitcoins with some internet connection.

A decentralized money market is an independent structure governed by a smart contract and powered by blockchain technology. Below are some of the benefits of decentralized money market.

Non-directive

The funds are in the hands of the central custodian in a centralized money market. And this can be a government or a financial institution. However, in a decentralized money market, borrowers and lenders have full control over their money. There is no central authority in a decentralized money market to control how people spend money. Also, decentralized money markets follow predefined logic in on-chain smart contracts, thus providing assurance that funds cannot be misused. Moreover, in a decentralized money market, users have complete control over when and how they can withdraw their respective funds.

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No need for permission

Decentralized money markets have smart contracts; therefore, users can participate in a permissionless manner because they do not need to seek permission. Therefore, with the decentralized money market without permission, users with access to the Internet can earn profits and lend working capital with minimal conditions and problems.

Also, the permissionless aspect of decentralized money markets helps create a wider user base, including the unbanked population. People in underdeveloped countries do not have access to banks, but this virtual currency allows everyone to transact. As long as you can access the internet and own a smartphone that you can operate, you can easily make this electronic money transaction in a decentralized money market.

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Overcollateralize

Traditional financial systems operate under uncollateralized and fractional reserves where users can borrow more money they deposit as collateral. On the other hand, a decentralized money market operates in an overcollateralized way. This means depositing more collateral than a person is borrowing. And if a borrower fails to honor their debt, the collateral is liquidated. Thus, lenders have a higher degree of security when requiring borrowers to provide collateral.

A decentralized currency market helps to end the control of a single entity and reduce the points of failure. Among the many benefits a decentralized money market offers, it allows system components to interoperate. Therefore, Bitcoin plays a massive role in a decentralized money market.

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