Decentralized finance is a relatively recent way of doing finance, only this time on the blockchain. Although many real-world investors have a deep distrust of blockchain technology, it is only a matter of time before their minds are swayed- DeFi is here to stay.
Decentralized finance differs from its traditional equivalent in that it makes do without the traditional intermediaries. Today, it’s estimated that there is over $100 billion worth of assets locked into decentralized finance, with well over a million investors involved.
It’s a fast-growing market, with even more institutional investors predicted to enter into the market, growing it to as much as $1 trillion in the coming years.
However, the adherents of traditional finance are not so happy. Asides from the fact that DeFi directly competes with the agents of conventional finance, there have increasingly been calls to regulate the space. In fact, the latter is the primary reason for DeFi skepticism in many quarters.
As an investor, you should consider expanding your portfolio into decentralized finance. It’s a new technology, but it’s here to stay. And the sooner you get on the bandwagon, the quicker you can begin to reap the benefits, some of which will be discussed below. But first, let’s delve into what is DeFi.
Decentralized Finance 101
DeFi stands for decentralized finance. It is a blockchain-powered ecosystem that provides traditional financial services and products, all without the need for the sometimes-chaffing regulations of traditional financial institutions.
The ecosystem has all the tools that help an investor, such as wallets, auxiliary services and digital assets. On it, there’s no need for a stock exchange or a broker and a bank. In the place of these regulations, what exists is smart contracts.
Smart contracts are a defining piece of the Ethereum blockchain and by extension decentralized finance. They consist of blockchain-based lines of code that automatically enforce the terms of a financial agreement, provided the set conditions are met.
As a result, it both monitors and executes a financial contract’s conditions. For instance, they can monitor release collateral, and loan agreements until the amount are fully repaid. Also, they can administer different kinds of insurance policies and make payouts based on the fulfillment of real-life conditions.
Decentralized finance offers the same range of products and services provided in traditional finance, such as loans, trades, payments, asset management, insurance, and investments. It blends well with crypto-based technologies like flash loans, synthetic assets, and decentralized exchanges as a blockchain-based innovation.
Benefits of DeFi
For a relatively new and admittedly controversial technology, DeFi has many uses. In fact, one reason for its swift popularity is that it offers higher utility than the regular fiat-based traditional financial systems.
Here are a few of the benefits of DeFi:
Inclusive and permissionless
DeFi is highly accessible. Unlike the traditional financial institutions that often require some form of ID and other documents, DeFi is entirely open-source. The peer-to-peer financial services it offers are accessible to anyone with a crypto wallet and internet connection.
Wherever on the planet you are, you can access loans and make investments using crypto. Even if you don’t have crypto, you can purchase some with fiat and store them in your wallet. From there, you can seamlessly carry out transactions and make investments from the comfort of your home.
You don’t need any middlemen that will propose difficult conditions like bank fees. It’s also quite convenient, as you can trade and move your assets quickly, the opposite of time-consuming traditional finance operations like a bank transfer.
One thing to note is that you may have to pay gas fees if the service you’re using is based on the Ethereum blockchain.
Even if you’re skeptical about adopting decentralized finance services, one huge benefit, possibly the tipping point for many, is the fact that the transactions are done in real time.
Traditional financial institutions are notoriously slow when it comes to carrying out transactions, often requiring hours, or even days to carry out. This makes the process inefficient and cumbersome.
If you need a quick loan, decentralized finance is your best best. Your traditional banks will take a while to give you the loan. Even worse, you may not be given the loan eventually because you do not meet the stipulated conditions. DeFi is a much better option, as a result.
On the blockchain, each transaction is updated on a real-time basis, with interest rate updates several times per minute.
One of the inherent qualities of blockchain technology is transparency. As the second-largest blockchain, Ethereum adheres to this trend by offering industry-standard levels of transparency on its network.
With over 90% of DeFi traffic passing through the Ethereum blockchain, investors are guaranteed of the utmost transparency in the conduction of financial obligations and interests. All transactions are verified on a consensus basis, and can be viewed by any node or user within the network, at any time. As a result, there’s little chance of fraud.
By using smart contracts and non-custodial wallets, users can hold on to their assets while the transaction is in process.
This is extremely convenient, as the smart contracts act as an impartial, automated escrow service to keep users in touch with their funds before the terms of a contract are fulfilled.
An important aspect of any financial service provider is the ability to provide maximum security for funds. And as far as decentralized finance in concerned, its underlying protocols are secured with the highest levels of encryption available in technology today.
With blockchain architecture, DeFi is not only transparent, but safe, tamper-proof and auditable. In many ways, DeFi is self regulatory, even without potential interference from national financial agencies seeking to protect consumer rights.
Programmable smart contracts
Smart contracts, the primary enforcer and enabler of decentralised finance is extremely flexible and programmable. It can be used to create contracts for countless numbers of scenarios and variables, making it convenient for a wide range of investment and financial purposes.
The operating protocols behind many DeFi projects, including Ethereum, are open source. This means that any sufficiently skilled blockchain developer can build on it, audit and view it.
The various DeFi apps are also interconnected within the network. As a result, it is possible to create new services and financial products without any license from Ethereum or similar DeFi projects.
With DeFi, it’s possible to manage your savings like never before. After locking up your crypto assets into lending apps like Compound, you can earn interest on your assets.
DeFi savings management apps can synchronize with these platforms to increase investors’ interest-earning potential. This is generally referred to as yield farming and is greatly beneficial.
Rather than leaving your crypto assets in one place, you can earn a passive income on it. Also, as an investor, you should consider the merits of managing your crypto assets from a single platform like CoinStats.
DeFi is new, but that hasn’t stopped many investors from buying into its undoubted potential to reap vast rewards. Although many government agencies are concerned about the long-term viability of a virtually unregulated platform, its popularity still continues to grow.