Decentralized Finance: What Is DeFi?
You’ve probably been hearing the word DeFi a lot. It stands for decentralized finance. We’ll discuss how it’s different from centralized finance, the benefits and drawbacks, and what you can do with it, and why it matters. Let’s dive in.
Many of the use cases for DeFi center around specific platforms, applications, and various blockchains, but the gist of it is that you can perform any financial transaction and use any financial tool that you could in the normal financial world but in a decentralized way.
The benefit of this is so that you can do these transactions at a cheaper cost without a middleman, you can do it freely without any restrictions, you can do it significantly faster, and you can do it privately. There are also new ways of making money that the average stock investor couldn’t take advantage of like liquidity mining or staking cryptocurrency.
A lot of DeFi is facilitated through the use of smart contracts. I will go more in-depth into smart contracts in another video but simply put, they enable you to perform a transaction with code attached. The most common form of this is to enable decentralized exchanges to trade between cryptocurrencies in a completely trustless way acting as an escrow service.
These are some examples of what DeFi is used to achieve:
· Transferring Money
· Lending and borrowing
· Margin trading
· Liquidity Mining & Yield Farming
· Wrapped Coins
· Prediction Markets
· Tokenized Stocks
· Non-Fungible Assets
Everything listed above was a service, product, application, or tool that DeFi offers, but what are some of the benefits of DeFi? What are some of the drawbacks?
· No middleman or gatekeepers
· You have total control and access to everything
· Open to everyone everywhere with no barrier to entry
· You don’t have to provide any personal information or KYC
· Solves remittance issues for transfers, namely transaction fees, and speed
· Typically transparent and open source
· Generally, no down-time and can be used 24/7
· Depending on what cryptocurrency you are using, transaction fees may be costly for active users
· Extremely volatile markets
· You must track everything for tax purposes
· Regulations vary greatly and can change at anytime
· Typically more complex than the centralized counterpart service/product/application
· Anyone can get involved easily allowing for more scams and sketchy projects
· There could be vulnerabilities in smart contracts that hackers could exploit
I love DeFi and think it’s the way of the future, but I will end with a caution that it’s becoming a buzz word and there are so many terrible DeFi projects that consider a high yield to be their use case which we have seen with projects like Titan from Iron Finance is not realistic or sustainable. My personal recommendation is to look into cryptocurrencies with products that are useful and don’t chase yields.
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What is the right way to invest? Do you prefer centralized or decentralized finance? What’s your favorite aspect of DeFi? Let me know what you think about this in the comments below and don’t forget to subscribe!
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*Disclaimer: This is not financial advice and is purely for entertainment purposes. What you see, hear, or read is my personal opinion, and any statements made are based on my views and should not be misconstrued as fact. My crypto portfolio may or may not be simulated*