If you have been around the crypto space for a while, you would have heard of the term Decentralised Finance (DeFi). It has been a surging investment trend at the beginning of the 2021 bull run and keeps its momentum during NFT’s recent meteoric rise. Learn more about the basics of DeFi and some of the most promising projects on the market.
The Terra Luna project has been soaring in the crypto market as of late. When other coins are red, Luna remains green. When others are green, Luna is greener, with even greater percentages up to 30% in a 24 hours window. This is a successful example of a DeFi coin that has gained the attraction of many investors. But what is DeFi?
Definition
Decentralized Finance, better known by its abbreviation (DeFi) is a blockchain-based system that aims to deliver decentralized financial products. Whereas Bitcoin is a decentralized currency, DeFi aims to deliver more than that.
Most of them have their own coin or token, but they also offer services such as brokerage, exchanges, or smart contracts. Each DeFi project generally has an ecosystem that gives its users extra perks such as fast, low-cost transactions compared to other projects.
Services offered by DeFi ecosystems
Decentralized exchanges
Decentralized exchanges allow you to exchange between different cryptocurrencies without using a third-party platform like Binance or Coinbase. It protects you from the risk of these exchange sites manipulating your earnings or shut down in certain scenarios. Furthermore, it allows you to have a fully decentralized experience if that is what you’re after.
Yield farming
The concept of yield farming is very simple. It is like lending the bank your money and receiving interest. DeFi companies want to increase the liquidity of their coin and will pay you to lend them your coins with very high returns. Most yield farming has more than 10% returns each year.
Liquidity is the symbol of usability, reliability, and also value. The psychology of investors indicates that they are more likely to invest when they feel safe about their investments. Companies want to foster this sense of security by increasing the liquidity of their coin hence offering lenders lofty returns.
How safe is DeFi
All investments have their own inherent risks, DeFi is no exception. The risk of DeFi is similar to the risk that comes along with cryptocurrency. It has not been time-tested, and what happens when every investor decides to ‘pull-the-rug’? However, objectively, the risk of investing in DeFi is not much larger than that if you put money into a bank or into an investment property.
Summary
DeFi is an exciting new avenue of investment within the crypto space. It offers many different ways of earning money with moderate amounts of risk – depending on the size of the company. If the future revolves around cryptocurrency, there is a 100% chance you will use the types of services that DeFi offers.
