Financial services offered on open blockchains, especially Ethereum, are referred to as DeFi (or “decentralized finance”). Earning interest, borrowing money, lending money, purchasing insurance, trading derivatives, trading assets, and other activities are all possible with DeFi, but the process is quicker and doesn’t involve any formalities or a third party.
DeFi is global, peer-to-peer (meaning directly between two people, not routed through a centralized system), pseudonymous, and available to everyone, much like cryptography in general.
Why is DeFi crucial?
DeFi builds on the fundamental idea of Bitcoin, which is digital money, to create a full-fledged digital alternative to Wall Street without any of the accompanying fees (think office towers, trading floors, banker salaries). This could lead to more accessible financial markets that are open, free, and fair to everyone with an internet connection.
What advantages are there?
You don’t have to submit any applications or “open” an account. By making a wallet, you can simply gain access.
You are not required to submit your name, email address, or any other private information.
Flexible: You have the freedom to relocate your assets at any moment, without needing authorization, without having to wait for lengthy transfers to complete, and without having to pay high fees.
Quick: Compared to typical Wall Street, interest rates and awards are frequently updated swiftly (updated as frequently as every 15 seconds).
How does it function?
Dapps, or “decentralized apps,” are primarily how users interact with DeFi, and the majority of them are now based on the Ethereum blockchain. There is no application to fill out or account to open, unlike a traditional bank.
Here are a few of the ways people are now interacting with DeFi:
- Lending: Rather than only once a month, lend out your cryptocurrency and earn interest and prizes every minute.
- Obtain a loan right now without having to fill out any paperwork, including the incredibly brief “flash loans” that conventional banking institutions do not provide.
- Trading: Trade specific cryptocurrency assets peer-to-peer, much as you would if you were buying and selling equities without the use of a broker.
- Future planning: Invest part of your cryptocurrency in alternative savings accounts to earn higher interest rates than you would ordinarily receive from a bank.
- Make long or short bets on particular assets by purchasing derivatives. Consider them the cryptocurrency equivalent of stock options or futures contracts.
What drawbacks are there?
Active trading might become pricey due to the Ethereum blockchain’s fluctuating transaction rates.
Given that this is a new technology, your investment may suffer considerable volatility depending on the dapps you use and how you utilize them.
For tax purposes, you must keep your own records. Regional differences in regulations are possible.