Disclaimer: The information on this article should not be interpreted as financial advice.
Decentralized Finance (DeFi)
Decentralized Finance, or DeFi is a sector in the cryptocurrency space that is full of opportunities.
Many users see DeFi as a means to financial freedom and an escape from low interest rates offered in Centralized Finance (CeFi) by banks and traditional investments. One of the main draws to DeFi are of course – lucrative & juicy returns! As an example, see the wide range of high interest Pools on 💎 Crystl.Finance/pools.
The biggest difference between DeFi and CeFi is in the concept of Decentralization. In traditional finance, you pass your funds to be held or managed by a central body, like a bank! This system is centralized, because one person (or a small group of people) gets to make decisions about these funds. People tend to like centralized services, because they are run by bodies they can trust.
In DeFi, the need for this sort of trust is significantly reduced. Rather than trusting other people to handle your finances, DeFi makes it possible for you to trust an unbiased, decentralized network of computers running complex cryptographic proofs to process and confirm information – such as transactions and account balances.
Decentralized applications (dApps) are services which allow you to manage and invest in cryptocurrencies, as well as interact with blockchains and transfer data back and forth. There are many kinds of DeFi applications, and it is truly a world of endless possibilities. Here are a few application use-cases frequently found throughout DeFi today:
Crypto Lending & Borrowing: These protocols allow users to lend their idle cryptocurrencies to earn a passive interest paid by borrowers. Borrowers on the other hand are able to take advantage of financial leverage. Aave is one example.
Decentralized Exchanges: Where users are able to buy or sell their crypto tokens for other crypto tokens through liquidity that is provided entirely by the global community of people using the protocol. Liquidity providers earn a small fee from users swapping cryptocurrencies, while swappers are ensured a fair market price for all token exchanges. ApeSwap.Finance is an example.
Yield Farming and Vaults: A way to earn cryptocurrency rewards with existing cryptocurrency holdings. Yield farming protocols reward users for providing liquidity or staking their crypto holdings in a protocol. Vaulting protocols on the other hand perform automatic compounding and reinvesting of those rewards. Crystl Finance is an example of a yield farming protocol that also provides vaulting services (sometimes called yield aggregation).
Decentralized applications make use of blockchain technology to provide financial services based on smart contracts, the code for which can be analyzed for malice or security by anyone in the world with an internet connection 🌐.
Of course — not everyone is a code expert nor has the time to read every smart contract. Luckily, trustworthy audit companies exist in this space and work in the business of identifying malicious smart contracts. Find out about contract authorization here.
There are many other types of decentralized applications. Recently, the market has been seeing a massive amount of incredible decentralized art projects making use of the revolutionary technology behind NFTs (non fungible tokens). Others yet are bringing more innovative solutions – such as decentralized sports betting offered by SportX, and even decentralized gambling platforms, like PolyRoll and Treasure Key.
Why Invest in DeFi?
Now that you have some idea about what sort of space DeFi is and the kinds of DeFi applications that are available — the obvious question you will ask yourself is “Why would I invest in DeFi?”. Here are a few reasons for you to consider 🤔:
- You like being in possession of your own funds
- You welcome the challenge and responsibility of managing your own finances
- You believe in the future of cryptocurrency
- You enjoy the concepts behind decentralization
- You are willing to seek and work for your own financial freedom
- You are comfortable taking risks and investing what you can afford to lose
- You want to take advantage of the innovative opportunities in the DeFi space
If you find yourself agreeing with at least some of the above points, then perhaps DeFi is for you!
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