It’s all the rage in cryptocurrency right now – but what is DeFi?
DeFi is an abbreviation of the term ‘Decentralized Finance’, and it’s pretty much exactly what the name conveys. DeFi is a cover-all term which encapsulates any form of financial service equivalent that is available using distributed ledger technology. It could refer to a digital asset like a stablecoin, a smart contract for lending, a protocol, a Dapp or much more.
What’s so great about DeFi?
Accessibility and trust
Financial services are traditionally things that you can only access by going to a bank or similar establishment. DeFi offers a wide range of instantly accessible financial services, the most prevalent of which is lending.
The whole point of DeFi is to remove trust and also make financial services available to everyone. With traditional financial services you are trusting your money with third parties, which means there is a degree of centralized risk associated with the service. It also means that these third parties can exclude people from receiving the services.
DeFi is open to anyone with an internet connection. The DeFi services are just complex bits of code that can be used by everybody. Even better – most DeFi services are open source, which means one can verify the integrity of the code and be absolutely certain where they are putting their money.
A huge part of any financial service is the returns available. Traditional centralized financial services rely on a large amount of middlemen to control your money. While they may be successful, you’ll lose a large chunk of your returns in fees and other costs. Interest rates in traditional finance are getting incredibly low and people are starting to notice.
In contrast, DeFi applications boast large interest rates such as 6% APR, and those are available with minimal work on the investors end. However, with some crafty moves and good market knowledge, people have been reaching interest rates as high as 100% APR using a technique known as Yield Farming.
You’re in control
With DeFi you control where your money is at all times, something that isn’t true with traditional financial services. What’s more, you can opt to move your money elsewhere at any time since you control your private keys. This is the biggest strength of DeFi.
Here’s a short list of some of the existing popular DeFi applications:
- Digital assets like stablecoins
- Lending protocols
- Swap services
- Investment platforms
What’s the catch?
DeFi is new and full of hype. The returns that people are earning are staggering, but you still have to be careful. Decentralized codebases have had huge problems before, causing people to lose a lot of money.
Even if all DeFi applications are set up without malice, it’s possible that one will have a code vulnerability that will be exploited in the future. If you are interested, make sure you do ample research and take care.