On February 17, Matt Hougan, Chief Investment Officer at Bitwise Asset Management, told ETF Trends that “DeFi will be the story of 2021”.
Digital currencies might be a sci-fi world where, instead of traditional banks and brokers, DeFi developers want to cut out the middlemen, enabling faster, cheaper, financial transactions, all day long, every day without transaction minimums, without paperwork, and with full transparency and accountability.
We can track the history of DeFi with the words of Nikita Soshnikov, the director of Alfacash Store.
Around 2013, the first Initial Coin Offering (ICO) was launched, called Mastercoin (now Omni). In addition, he explained that they used a new mechanism of fundraising, similar to IPOs. A year later, BitShares introduced the first stablecoin (up 400% since December 20). Stablecoins and ICOs could ultimately be crucial for the development of decentralized finance,
DeFi by 2021?
DeFi's growth accelerated in 2020, increasing from $700 million in December 2019 to $13 billion on December 31, 2020. A variety of industry sources and cryptocurrency exchanges suggest that it hit $40 billion this year.
Do you want to invest in DeFi but don't know where to begin? Learn how DeFi works, how to invest in DeFi tokens, and how to get started using decentralized financial applications by reading on.
How DeFi works
Using DeFi, we can avoid relying on centralized financial institutions like banks, exchanges, and insurers. Smart contracts, such as Ethereum's, enable DeFi systems to achieve distributed consensus. Smart contracts require developers to synchronize specific actions only when specific conditions are met.
For instance, you could write a smart contract that stipulates that you will pay someone $500 if the Cardinals win the World Series this year. Upon being pushed to the blockchain, the smart contract is visible to everyone on the network, but it cannot be altered. Smart contracts govern decentralized apps or "dapps," which do not belong to and are not managed by any single company or individual. Smart contracts were initially developed for Ethereum, but are now found on other blockchain platforms as well.
With DeFi, any two parties can transact privately and securely without the involvement of a third party. As a result, more people can obtain financial services at lower costs or receive better interest rates than they would have with traditional financial institutions.
Investing in DeFi
DeFi projects have expanded into tens of thousands of cryptocurrency projects, so it is difficult to differentiate long-term platforms from short-term cash grabs. According to the general rule, if a coin offers high returns without doing anything (also called frictionless yield farming), it's probably a pyramid scheme with no long-term potential. To stay safe, it is suggested that you stick with the DeFi tokens with high liquidity and large amounts of cryptocurrency staked on the platform. An investment in a token with a smaller market capitalization is generally considered riskier.
A few high-growth DeFi tokens with long-term growth potential are presented below.
Aave: Aave is considered the world's largest cryptocurrency exchange. Aave manages the most cryptocurrencies out of all the DeFi platforms in existence. As well as allowing users to deposit their crypto into a savings account to earn interest, Aave users can also take out collateralized loans to leverage their crypto holdings.
UniSwap: The most popular decentralized exchange (DEX) on Ethereum is UniSwap. Users of Unswap can trade cryptocurrency without having to deal with a centralized exchange. Users' Ethereum wallets can interact directly with smart contracts, allowing them to exchange crypto without needing permission.
Yield.finance: Yield. finance has existed since DeFi's early days. While it offers decentralized loans as its main product, it also provides decentralized insurance and yield farming. As part of its commitment to being the best interest rate provider on the market, Yearn Finance deploys users' funds in other DeFi protocols, such as Aave, Compound and Dydx.
Curve: The curve network underpins many other platforms. Similar to Uniswap, it operates as an automated market maker (AMM), but it has additional features too. With very low slippage and fees, DAI and USDC tokens can be transferred easily and quickly with the platform.
DeFi Pulse Index: A tokenized asset representing major DeFi platforms, the DeFi Pulse Index, can be bought on Uniswap, so you don't have to choose your DeFi investments individually.
DeFi: Why should I use it?
The benefits of working with a DeFi platform instead of traditional financial institutions can be numerous, regardless of what you need to accomplish. Here are the primary reasons why people choose DeFi :
Fees are low and interest rates are high
An easy-to-use interface
Transparency and security are enhanced
Autonomy in functional terms
Is DeFi a safe investment?
It is possible for negative outcomes to occur because DeFi technology is so new. It is very common for startups to fail, and program errors can create lucrative opportunities for hackers. In the event that your funds are invested or stored with a DeFi project that fails, you may lose your entire investment.
DeFi platforms don't generally provide any means of recovering lost funds, unlike centralized financial institutions that are insured by the Federal Deposit Insurance Corporation (FDIC).
A consumer with a problem with a traditional financial transaction can file a complaint with the Consumer Financial Protection Bureau (CFPB), but no such recourse exists if a DeFi transaction is fraudulent.
To remedy these shortcomings, there is a new type of DeFi application on the market. Those who wish to protect themselves against losses from smart contracts are being offered decentralized insurance created by individuals pooling their cryptocurrency as collateral. Collectively, the contributors to cryptocurrency pools charge the insured a premium.
Does blockchain-based DeFi, based on cryptocurrency and NFTs, signal the future of finance?