DeFi (Decentralized Finance) is one of the latest technologies to come out of blockchain technology. As the foundation of it is similar to cryptocurrencies, you may have heard of them used in tandem. Many of these platforms and products use crypto for financial transactions.
For many, DeFi presents an alternative that can potentially change how the world sees finances. It gives back control to the majority, allowing people to transact within the need for intermediaries. DeFi removes the monopoly that banks and similar institutions have over monetary transactions. Here’s what you need to know and why many are looking to DeFi as their next investment.
Decentralized Finance in a Nutshell
DeFi refers to all types of technology and solutions meant to decentralize finance. That means removing the control third parties have over financial transactions and giving them back to the people. DeFi is an attractive option for many users. The reason for this is because of the following:
- It eliminates fees, charges, and delays caused by financial companies when using their service.
- Keeps money secure digitally and away from the hands of banks.
- Transfer funds faster, no longer needing to wait days for the money to move.
- Anyone with the internet can make a transaction, and no approval is needed to move money.
How is DeFi able to do all these things? It’s all thanks to emerging technology like blockchain. Distributed ledger technology is fraud-proof, and transactions become legitimate across the digital sphere. We also live in a world with digital equivalents of real cash and higher-valued investments like Bitcoin.
The biggest question many ask is: how does DeFi survive without someone maintaining it? Most developers can earn money without needing to take fees from their users. A lot of these platforms operate because of the contributions of many.
In short, as long as someone uses the service, it will be able to maintain itself. Add to that how DeFi connects to the metaverse, and you have an element in a much larger ecosystem.
Why DeFi is the Future
On the opposite end of DeFi is the system we’ve all come to accept: centralized finance. Every aspect of money in the world before DeFi operated through gatekeepers and governing bodies. These entities were responsible for dictating rates and could prevent transactions if they didn’t seem legitimate to them. The entire financial system builds around this, including:
While the original intention for these institutions was to protect consumers, today they’re a controlling factor. Consumers have limited options with the services they use because of strict requirements. They cannot bypass the intermediaries to get what they need. Everything comes with a price.
On the other hand, DeFi takes all the key elements that make centralized finance work and places them on an infrastructure that operates in the hands of the people.
For example, a bank may offer you a 0.5% interest rate but lends with 3%. That means that they are earning 2.5% more from the transactions. With Decentralized Finance, the one with the deposit will gain the total interest instead.
Another aspect is transactions. Often, payment companies dictate fees and rates without anyone being able to change things. Now with DeFi as an option, no one has to settle for waiting days for their salary or pay unfair rates set by these entities.
Other Benefits Provided by DeFi
Apart from removing the middleman from each transaction process, Decentralized finance has other benefits. Some examples include:
- Transparency: You’ll be able to see every transaction occurring through DeFi because the ledger is public. Financial companies rarely let the public see what goes on beneath the surface.
- Speed: Rewards and transfers in DeFi are immediate. Because there is no intermediary, people also get more value for their money.
- Flexibility: DeFi provides the average person to move their assets anywhere and anytime.
- Anonymity: Most platforms allow the user to remain anonymous during transactions. You don’t have to provide personal information to transact.
- Accessibility: It’s easy to open and start an account connected to DeFi. You only need a digital wallet, and you’ll be ready to transact.
What Can I Do With DeFi?
Most Decentralized finance solutions operate through platforms and applications. Dapps (decentralized apps) run on a blockchain that connects the services. One of the most popular blockchains to adopt DeFi is Ethereum, though it is also present in other popular chains. Here’s what you can do with DeFi:
- Lend out your money (as cryptocurrency), earning interest and rewards.
- Buy digital assets or derivatives.
- Open a digital savings account that has better interest rates than a bank.
- Trade using money equivalents (stablecoins) and crypto assets. It’s possible to buy and sell without a broker.
- Gain access to loans that aren’t typically available with traditional lenders.
One of the concerns among newer investors is how volatile the crypto market can be. Many DeFi products operate through stablecoins. These are cryptocurrency assets that follow the value of money. For example, the USDT (Tether) follows the value of the US dollar. It gives stability and assurance to investors, knowing they can exchange their money for lower-risk assets when needed.
The Risks of DeFi
As an emerging technology, there are still some kinks to work on with DeFi crypto. There is still a struggle with regulation because some people still want accountability within DeFi. The other side argues that strict rules on DeFi will defeat its purpose. While some degree of regulation may be necessary, people are still figuring it out.
The biggest concern among many is that scams and criminal elements may take advantage of its accessibility. Many have believed fake crypto projects or inexperienced companies left investors with nothing.
As such, people should continue to practice their due diligence. Don’t be swept away by the hype of all-time highs and such. A good investment is always something that can last long term. It has a vision for the future and a team that dedicates itself to more than its monetary value.
On the technology side, some improvements need addressing. Hacks and exploits are still present. Very few of the big DeFi names remain unharmed by these malicious entities.
Once we have everything addressed, DeFi will likely help shape the future. The opportunities can be enormous if one takes the time to understand their investments and give enough space for the market to make moves.
DeFi only continues to evolve. We now have things like NFTs, which are digital collectibles with value. Even traditional banks are looking into providing crypto solutions to get into the competition. The positive thing about it is that while it’s still in its early stages, investors have the opportunity to get in early.
The potential is high, and with people dedicated to cultivating it, we should see more adoption in the future. For now, investors should be cautiously optimistic. If they’re planning to invest, they should always spend time doing research first. Technology, such as DeFi, that only aims to help people is always a positive thing, and one we should keep a lookout for. To learn more about how Blockchain can change the way we track and use money read our mother-article on Blockchain, you will find that the right approach can be the solution to many of our economical and social problems.