What you should know about Decentralized Finance
The current financial system is well known in the industry. The open-source, blockchain technology unleashed a new financial system for our financial needs. Decentralized finance is an alternative to our current financial system. In this system, you can save, borrow, lend, invest, trade, pay, and much more. Our present financial system is tightly controlled and opaque which is old infrastructure and process, followed from decades.
Defi financial services are offered to everyone who has an internet connection. Unlike the current financial system, you can own and maintain the Defi services. The current turnover of the system is tens of billions of dollars every day!
A Defi is a collection of financial products and services that can be accessed through the Internet and one that uses Ethereum. Defi services are always open and no one interprets or question you anything about your payment. The services with the traditional financial system are slow and with human errors. Also, the code they use for safer transactions can be studied by anyone.
What are the drawbacks of the current financial system?
Not everyone can have a bank account and use its services that can affect people to become an employee. There is always a hidden charge on your bank services. Whenever the Government wishes, it can close down the finance institutions. Only at business hours, you can trade through Banks. Due to the internal human process, the transactions may take few days sometimes. These finance institutions offer premium services with an intermediate to deal with.
The difference between traditional financial services and decentralized finance services:
- In a decentralized financial system, you hold your money while in a traditional system, the company holds your money.
- While it may take few days to transfer the funds due to the manual system, Defi offers fast transfers, that is, within minutes.
- Defi is open-source while in the traditional system, you need to apply to use the services.
- The market is open every time in Defi while it is open only during business hours in the traditional system.
- You can control your money transactions in Defi while in the traditional system, you should keep tracking where is your money being put for the profitable gesture.
- The records on the Defi system are transparent while in the old system, the records are closed to the users.
The first application of Defi was by Bitcoin. Bitcoin has the uniques feature of controlling your money by yourself and transact it anywhere in the world. Without any need for intermediate, Bitcoin can keep an account of your transactions and not anyone to access it other than you. No one can change the Bitcoin principles which is why it is trusted by people.
Bitcoin is open-source with the latest blockchain technology which is not like our traditional government finance system. In the traditional finance system, the government prints your money, and companies can shut anytime.
What is the use of Decentralized finance?
As I said earlier, this is an alternative to the current financial services. Ethereum is in the new model now, that is, it allows us to create financial products. The list of uses of the Defi is long.
- You can send money anywhere in the world and even you can stream your money globally.
- You can access those stable currencies through Defi.
- You can borrow any funds with or without collateral.
- You can use it for crypto savings
- You can trade your token through it.
- Your portfolio can be grown with Defi.
- You can establish your ideas in your way.
- You can even buy insurances
- You can manage your portfolio through it.
How can you invest in Defi?
Trading and acquiring Defi tokens
To start investing in Defi, purchase some Defi assets for the short-term or the long term. Investment should be such that, it is better to buy the asset when it is low and to sell when it is high. Use any decentralized exchanges to scout project tokens that have growth potential or you can invest in any established protocols.
Yield farming
It is the best and familiar way to earn passive income to use decentralized finance. The exchange of incentives is earned by moving crypto assets between protocols and projects through network liquidity. The important thing you should notice here is the best rates to earn the highest yield in the liquidity pool before you move between the protocols.
Earn interest through liquidity pool
Defi allows users to earn passive income in many ways. The decentralized loan platforms allow users to borrow and deposit with the ability to interact with each other. Here the depositor, for the sake of earning interest, supplies the liquidity, and the borrower borrows from the provided liquidity.
What you should consider before investing in Defi?
Before investing in Defi, you need to consider the major things like User Adoption, Market needs, invest for Long Term, understand the system and its working.
What risks the Defi investment includes?
The Defi is mainly popular for the great asset, that is, the decentralization that gives a warranty for your asset. Crypto investment is always a risky one when new projects or protocols are introduced with a lack of central authority.
Staked funds should be locked for a given period for the staking token process. And, at the same time, users might have to deal with the market fluctuations. Sometimes, even smart contracts can affect the stake fund or payout due to faulty blockchain protocol.
The Defi system is an outburst in 2020 and it should be relevant in the year 2021. The risks are always there. We have seen how Robinhood’s widely unpopular move had gutted the Reddit stocks earlier this year which is the example we need to keep in mind that, it might fail anytime. Before investing, it is always recommended to study the Defi area wisely.
For every good thing, there are some drawbacks too. A wise decision can take you to the top.