There are centralized money markets and decentralized money markets. So, a decentralized money market functions 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. Moreover, a healthy economy should be able to put idle capital to work, enabling people to borrow money to grow their businesses and pay for expenses. Also, a healthy economy should allow others to lend their financial assets and earn profits to increase their savings. To know more about Bitcoin, you can go through this website Bitcoin system.
In simpler terms, a money market is a platform that connects borrowers and lenders seamlessly. Over time, these money markets have changed. However, their purpose has remained the same over time. Borrowers use money markets to access a short-term loan to borrow their preferred currency while putting up another currency or asset as collateral. This collateral is essential if the borrower fails to pay back their debts. Eventually, if the borrower fails to pay back the debts, the collateral is sold to pay back the lender their dues. However, the borrower may get the collateral if they honor the obligation and pays.
Moreover, borrowers pay a fee in the form of an annual interest rate for them to be able to borrow working capital from lenders. The interest rate is a function of supply and demand to ensure enough liquidity is available to borrowers and lenders.
However, with the rise of decentralized finance, decentralized money markets enable users to access, borrow, and lend Bitcoins with some internet connection.
A decentralized money market is a self-driven structure run by a smart contract and powered by blockchain technology. Below are some of the benefits of decentralized money markets.
Funds are in the central gatekeeper’s hands 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 total control over their funds. No central authority in a decentralized money market controls how people spend money. Also, decentralized money markets follow the predefined logic of on-chain smart contracts hence granting 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.
Require no permission
Decentralized money markets have smart contracts; hence, users can participate in a permissionless manner as they do not have to seek permission. Therefore, with permissionless decentralized money markets, users with access to the internet can earn profits and borrow working capital with minimal requirements and issues.
Also, the permissionless aspect of decentralized money markets helps create a broader user base, including the unbanked population. People in underdeveloped countries do not access 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 transact this electronic currency in a decentralized money market.
Traditional financial systems operate under undercollateralized and fractional reserves where users can borrow more funds they deposit as collateral. On the other hand, a decentralized money market operates in an overcollateralized manner. That means depositing more collateral than what a person is borrowing. And if a borrower fails to honor their debt, their collateral is liquidated. Thus, lenders have a higher degree of security by requesting borrowers to provide their collateral.
A decentralized money 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.