Over the past few years, we have witnessed the rapid development of the cryptocurrency. Most recently, bitcoin – the world’s largest cryptocurrency by market capitalization – has climbed to unprecedented highs and this has not just been reflected in the markets. Along with trading exchanges and crypto OTC desks, both private and institutional investors have been showing great enthusiasm for BTC. This can be seen in the rise of massive investments in blockchain ventures, tokens and digital currency projects that crypto venture capital funds have made in 2020.
Today, there is a new form of finance that is bringing a fresh wind in the cryptocurrency industry in times when the asset prices remain 75% lower than where they were three years ago. What is DeFi? Short term for Decentralized Finance – refers to the fact that people can recreate traditional financial instruments without relying on central financial intermediaries, using smart contracts on blockchains.
What is DeFi, exactly?
Decentralized Finance, commonly known as DeFi, is a broad term referring to a host of new protocols, tools and services in blockchain, marking the transformation of traditional financial instruments via decentralized networks. DeFi consists of tools that allow users to lend, borrow, exchange and swap crypto assets securely, without the help or participation of the middlemen like investment banks, hedge funds or any other financial intermediaries.
Trading crypto has existed for more than a decade. What’s new about DeFi, nonetheless, is that the services function independently in decentralized building blocks. These blocks are not governed by smart contracts rather than being controlled by third parties thanks to the participation of the market. Almost anyone can take part in DeFi if legally allowed to, whether you are an ordinary individual with idle funds, a professional investor, or financial intermediaries.
What are some applications of DeFi?
Bitcoin and Ethereum are probably the earliest and most successful forms of DeFi applications. They are controlled by huge networks of computers, not central authorities. Many investors consider bitcoin as gold, a store-of-value asset whose values do not fluctuate much despite inflation and other financial as well as economic volatility. Meanwhile, Ethereum platform and its native cryptocurrency Ether (ETH) have been playing an increasing instrumental role in helping businesses crowdfund their activities, regardless of controversies.
Today, with FinTech developing at an accelerating rate with more breakthroughs in the field, new applications are involved in the DeFi movement. For example, Dai is a stablecoin digital token that is aimed to be worth as close to one US dollar (USD) as possible. Unlike bitcoin, Dai’s value is pegged to USD, significantly reducing the volatility that prevents bitcoin from completely replacing traditional money for everyday payments. We also have Compound, representing the crypto version of a money market fund, allowing users to benefit from interest. In addition, there is Litecoin that enables instant payments to receivers around the world.
Why is DeFi so popular?
Without doubt, DeFi has been facilitating financial freedom around the world. It offers tools for investors to protect their wealth from tough capital controls. Besides, DeFi makes the remittance process faster, simpler and more cost-effective, without KYC (Know Your Customer).
Since there is no restriction related to wealth, social status or religion, almost everyone can take part in DeFi. This is definitely an advantage for those who can not get access to traditional financial services because of the lack of formal documentation or the absence of such services in that country.
Another thing that makes DeFi so popular is the rapid rise of stablecoins. Stablecoins are cryptocurrencies that attempt to peg their market value to some external reference. One problem with stablecoins that they are not always stable.
Does trading in DeFi space equal speculative investments?
It is not absolutely wrong. Pouring funds into DeFi instruments is not like when you put capital in a business with the expectation to achieve profit in the long term. When participating in DeFi, you, in fact, are hoping for income in the short term, facilitating the mobility of funds and enabling decentralized markets to function.
Crypto investors can choose from a wide range of strategies to follow. Each method will present certain risks, some of which are significant. By having a solid understanding about the market and the industry and constantly updating it, you can gain profit without being exposed to price market turbulence.
What are the risks that we may encounter?
Most risks connected with DeFi are human mistakes such as utilizing the wrong tools, there exists concerns in terms of technical, financial, and systemic aspects.
- Technical risks: DeFi is still in a very early phase so the technologies are not perfectly completed. This may result in hacks, the threats from ransomware viruses or technical limitations that may prevent users from making the most of DeFi applications.
- Financial risks: Liquidity is one of the greatest problems for DeFi applications. For instance, if DAI liquidity is too low, the price of DAI could divert from its peg and drop below 1 USD, affecting protocols that depend on DAI’s stability.
- Systemic Risk: Many DeFi applications rely on the price of Ether. If the ETH price falls to an unexpected low, that may affect the entire ecosystem.
What can Yield help you with DeFi?
YIELD is a licensed FinTech company that provides a mobile app and web platform designed to make it easier and faster to invest in DeFi with crypto.
YIELD is aimed at giving customers safe and quick access to DeFi, besides helping you to save a great deal of time and effort.
Their team understands that DeFi is an exciting new field that holds various potentials and opportunities for everyone. With the help of YIELD and your own expertise and experience, you could safely and effectively obtain returns from trading DeFi instruments. YIELD minimized any unwanted human errors.
The bottom line
DeFi is a great way to gain massive income, yet you need to have solid understanding and great experiences to be able to succeed, whether it is about technology, finance or any other factor.
Yield Farming protocols require much attention to price changes so you can see this as an active income. Also, only those who start to trade cryptocurrencies early can get most benefits. So if you want to make investments in DeFi, it is better to get to know about the field and platforms like Yield right now.