Blockchain technology is the latest and ongoing trend in the financial market, and it completely changed how people perceived the idea of money and assets. The rise in blockchain technology gave birth to decentralized finance. Decentralized Finance (DeFi) is making financial services more accessible and economical by taking out the middleman.
What is Decentralized Finance (DeFi)?
Decentralized Finance (DeFi) is a form of finance based on blockchain technology, which does not depend on a centralized system to offer financial services like lending and borrowing of funds.
Decentralized Finance (DeFi) takes financial intermediaries like brokerages, banks, and exchanges out of the equation and performs the financial services using blockchain technology. Removing a financial intermediary can drastically reduce the number of expenses and time that is taken during transactions.
Some applications of DeFi are Decentralized exchanges, stable coins, lending platforms, wrapped bitcoins, etc.
How Does Decentralized Finance (DeFi) Work?
DeFi revolves around Decentralized applications, also known as DApps, that are used to perform financial actions on blockchains. Instead of using a financial intermediary as a middleman, DeFi allows people to make transactions directly to each other, mediated by Smart Contracts instead of an intermediary.
A Smart Contract is a piece of code stored on the blockchain that is executed when certain predefined conditions are met, like sending funds to a party or receiving funds from a party. Smart Contracts can then be used as proof of transaction. These are extremely hard to hack, which makes DeFi much more secure.
Ethereum is closely related to Decentralized Finance (DeFi) because Ethereum was initially designed to work as an infrastructure to develop DApps. It automatically generates Smart Contracts when transactions are made.
Should you Invest in DeFi?
After Bitcoin, Decentralized Finance (DeFi) is the new hottest trend. DeFi is a very promising platform for investment due to the increase of public interest in recent years.
In September 2020, Bloomberg wrote an article on DeFi stating that the DeFi collateral level has reached $9 billion. It makes up to two-thirds of the cryptocurrency market in terms of price changes. This increased interest in the market for DeFi was the cause of the increase in Ethereum’s price.
One of the main factors that make DeFi an amazing investment opportunity is that it is in its early stages and growing at a very promising rate. In the first quarter of 2020, some of the best DeFi tokens increased value between 20x and 1000x.
Some of the functionalities of DeFi include easier accessibility, low transaction fees, increased transparency, increased security, etc. This makes it a very promising technology whose value is only bound to increase with time.
Like any other investment, DeFi also has some potential risks. One of the main risks is that you will lose all of your investment if you get locked out of your crypto-wallet. However, this risk is easily avoidable with some precautions.
Another potential technical risk is the Smart Contracts being hacked, but it is very unlikely to happen with the amount of security involved. So, the rewards of investing in DeFi easily overtake the potential risks, and it makes DeFi a very promising investment.
