July 27, 2021 7 min read
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From giants like Tesla, Square and Microstrategy to small-scale traders, everyone is betting on blockchain projects. And why not? Within a decade, the crypto market has grown exponentially to reach a market cap of over a trillion dollars.
Blockchain technology is not only used to create cryptocurrencies or tokens. Companies like Amazon, IBM, Google and others are embracing the underlying technology behind cryptocurrencies — blockchain — to enhance their IT services.
Another misunderstanding is that cryptocurrencies are only used as a medium of exchange. Well, thanks to DeFi, the technology has brought every financial service you can imagine, whether it’s lending, borrowing, payment or derivatives, on the blockchain.
Decentralized finance or DeFi is a term used for financial applications built on top of blockchains through smart contracts. These are self-executable programs on the blockchain that are pre-programmed to run certain functions once the defined conditions are met.
Think of DeFi as an alternative to the traditional financial infrastructure created using blockchain technology.
Here are five reasons why you should jump on the DeFi bandwagon.
Decentralized, secure and transparent
No central entity controls DeFi applications. Instead, DeFi apps are run by smart contracts that are open for everyone to inspect and scrutinize. Furthermore, you can participate in the governance process of DeFi apps by voting on the platform proposals.
In short, the DeFi space is transparent and governed by people in the community like you who participate in it.
From cryptography to secure storage of data, DeFi inherits all of the security features from cutting-edge blockchain technology. Plus, the smart contract code also exists on the blockchain.
There is no denying that smart contracts can be faulty and may lead to thefts. To avoid this, go for DeFi applications with smart contracts that are audited by reputed, independent auditors.
DeFi gives you total control over your assets
Traditional financial services are tightly controlled by central entities running them. However, such gatekeepers come with many disadvantages, like hefty middlemen charges, low transaction latency, entry barriers and more. Most importantly, with traditional financial services, you have less control over your money.
On the other hand, DeFi eliminates intermediaries from financial services and offers you total control over your assets.
DeFi brings a wide range of financial services that are open to all
The prime reason why DeFi is getting massive adoption is its ability to provide simpler, borderless financial services. DeFi applications are spread over a range of financial services like payments, decentralized exchanges, stablecoins backed by stable fiat assets like the U.S. dollar, lending, borrowing, prediction markets, insurance, derivatives, yield farming and so much more.
Every day, something new is being built in the DeFi space.
For example, how do you get a loan from a bank? You submit tons of paperwork and go through complex procedures, right? In the DeFi space, getting a loan is simple. You deposit the collateral, and your loan will be credited to your crypto wallet.
Long story short, DeFi is borderless. Everyone has access to financial services in the DeFi world. There is no entry barrier to DeFi. You don’t need paperwork, a bank account or even a credit score. All you need is an internet connection and a crypto wallet; that’s it.
Most importantly, DeFi applications are open source. Anyone can view the underlying smart contract code running those applications. Not only can you view their source code, but you are also free to use it to create your own DeFi apps. Thanks to such composability, DeFi apps are called "money legos." You can snap together DeFi apps to create a unique financial service.
DeFi could be a tool to end corruption and monopoly
Unlike traditional financial systems, DeFi applications are governed by the people using them. For any proposal to be approved, there should be a majority consensus. Also, as discussed, DeFi applications are public, and anyone can audit their transactions. As such, there is no room for corruption in the DeFi space.
Also, there is no monopoly in the DeFi space. Why? Because the underlying code is open to all. Everyone is welcome to create DeFi applications.
Early mover advantage
Even though the first projects in DeFi space were started a couple of years ago, the DeFi world is still in its infancy. It is still far away from mass adoption. Considering the skyrocketing growth of DeFi, you will be sitting on huge profits in the future if you manage to get on the DeFi bandwagon before it becomes a household name.
Fast forward to today in 2021; the DeFi space has hundreds of applications amassing a total value locked (TVL) of over $50 billion, as of now. This is exponential growth in any market.
So, how do you get started with DeFi?
It’s quite simple and straightforward actually. Download a secure crypto wallet or install the popular add-on metamask on your browser, then buy some native tokens of the blockchain you intend to use. There are many to choose from, including the most popular, Ethereum.
If Ethereum fees are too high for you to test things out, go for faster blockchains like Fantom, where fees are a fraction of a cent, and everything is exactly like Ethereum but better (Fantom is an Ethereum Virtual Machine (EVM) compatible blockchain that provides scalable and faster blockchain-powered solutions, something its predecessor isn’t capable of at the moment). Buy some FTM (you will need to use the native token of the blockchain you intend to use as the transaction fee, known as gas) and play around on popular DeFi platforms on Fantom to get familiar with things.
On any major blockchain, the overall basic how-tos would be similar to the above. Once you install a wallet and have some tokens in it, you can start your DeFi journey.
You can choose to buy assets, lend or borrow cryptocurrencies, earn fees by providing liquidity to decentralized exchanges (DEX) or invest in emerging DeFi projects, and much more.
Most importantly, always rely on your risk appetite and analyze your personal-finance goals before diving into the DeFi space, as there are also risks and scams. And never invest what you can’t afford to lose.
Like any other new technology, it is not all rainbows and sunshine. There are thefts due to things like smart-contract failures, scam projects and rug pulls (when developers abandon a project and run away with the funds). Even billionaires aren’t spared, like the recent incident with Mark Cuban, who got rug pulled while yield farming (after blogging about its high APR and investing in it) on Iron Finance, as its native token crashed to zero in one day.
DeFi projects can yield great returns given you have done your research properly. The rule of thumb to avoid scams is to stay away from projects that seem too good to be true and have no real value.