The World Bank estimates that the global unbanked population is over 1.7 billion, which points to an obvious truth about traditional financial institutions: they have fallen far short of their large promises of financial inclusivity worldwide.
Why is this the case? Banks and other financial institutions are in a rut to make the most bang for their buck, despite all the talks of rolling out financial services to the poorest of the poor. Finally, though, Decentralized Finance (DeFi) is here to change the tide, aiming to offer banking services to those people who do not have an account at a financial institution.
DeFi is unique in that, unlike the traditional finance system, it has no entry requirements, and anyone can access these applications. The only thing that is required is the internet and a small degree of know-how. Built on top of public distributed networks and using self-executing agreements written into lines of code known as “smart contracts”, there are several ways to get started with DeFi. So, without further ado, let’s dive right into them!
2020 was the year when DeFi first began to gain recognition, and in no time, the total assets locked (TVL) in the ecosystem grew from $600 million to $18 billion. Then, in 2021, DeFi entered the mainstream, with its TVL skyrocketing past $250 billion.
And while the market has since taken a breather, the TVL still stays above $100 billion, and is now finding its usage in the new trends of non-fungible tokens (NFT) and the metaverse. Today, thousands of decentralized applications (dApps) are available on the market for you to try out and put your money into, covering stablecoins, borrowing, lending, automated token exchange, prediction markets, synthetic assets, and much more.
Over this past year, the DeFi space has also become a bit more complex – and at the same time, attractive – as networks like Ethereum, Solana, Avalanche, and BSC compete for attention. This has led to most large protocols now supporting various blockchains, with the difference between them often being ease of use and transaction fees.
While the availability of choices continues to increase, wallet extensions like MetaMask allow users to access these networks from one device with only a few parameters having to be changed in order to switch networks. These wallet extensions enable users to access their funds directly on their browsers, and are password-protected. They often have mobile applications that can be used to access DeFi projects, as well.
But of course, before getting started with DeFi, you first have to buy crypto. For instance, if you are going to use the protocols built on the Ethereum blockchain, you will need Ether (ETH) to pay for gas fees. Moreover, DeFi applications are built on top of blockchain networks, each with its own native tokens.
Because of this, Coinbase has become a popular medium for engaging with DeFi. But while easy to use, Coinbase is also known for its high transaction fees and customer service issues. Besides Coinbase, other centralized exchanges (CEXs) are also widely used to access DeFi – but again, the problem lies with fees, custody, and security.
While there are tons of products and services in DeFi, the sector is interconnected. This means that you need complex strategies to improve your yields, but because of composability, your risk will increase as well. This means that a bug in one protocol could also lead to losses in another.
Choosing the Right One
Choosing the right DeFi investment strategy is further essential to yielding significant returns. Staking is one such strategy, and among the easiest ones, as it involves locking your idle asset in a smart contract for a stipulated amount of time. Staking offers the potential for high returns, but this isn’t a 100% risk-free exercise like it is often advertised, as the value of your staked crypto is not constant. It involves lock-up periods, and of course, you have to entrust your crypto to another platform like an exchange.
On the other hand, yield farming is a sophisticated strategy that combines staking, lending, and borrowing to optimize earnings. As such, they have high returns, but this also means they have higher risks.
DeFi indexes are another option that provides stakeholders with a diversified cryptocurrency asset portfolio. Much like S&P 500 ETFs, which track the value of 500 major companies listed on US stock exchanges, DeFi indexes follow a similar framework – but for cryptocurrency tokens.
Also similar to ETFs, what makes indexes so attractive is that tokens in a given index are often selected on strict criteria, such as size or volatility, thus allowing for effective analysis and research.
The advantages of investing in indexes are that they are low cost, convenient, offer diversification, and require little financial knowledge. However, they also carry the risk of lack of downside protection, no choice in the index fund’s composition, and the structure cannot beat the market.
A More Streamlined Process
DeFi is still in its early days, however, and as such, DeFi users should be sure to do their research on new products and services. Not to mention, smart contracts can be vulnerable to both malicious hacks and unintended programming mistakes.
Additionally, the first generation of DApps were built by blockchain enthusiasts for other blockchain enthusiasts. But that is changing now, of course, as the latest iterations of DeFi apps are now prioritizing design and ease of use in order to take open finance mainstream and reach a broader audience.
For instance, DeFi enthusiasts usually buy crypto assets like ETH on Coinbase and other CEXs, and then transfer them to a different wallet before they start trading. This process needs to be more streamlined, and METL is currently building one such decentralized fiat on-ramp solution for quick and easy access to DeFi strategies.
This patented infrastructure for fiat gateway does ACH settlement in ERC20 token to connect US banks to Web3. The payment solution aims to bridge the gap between fiat and decentralized financial systems and onboard the next generation of users from the world of traditional finance into the burgeoning digital currency space.
For instance, METL allows its users to go straight from their bank account to use the AVAX ecosystem on the DEX TraderJoe. The only fee a user pays while bridging their funds is the gas cost for the network or the one charged by the bank. Put simply, anyone with a bank account can bridge into DeFi via METL.
By connecting US bank accounts to Web3 wallets, METL further empowers users to enter the world of crypto seamlessly in a secure and cost-efficient way. The company initially launched the beta version of its app in early 2022, and is now preparing for the next phase of the revolution.