Written By: Adam Tarlowski
Leading up to the next major bull run, DeFi has taken center stage as a new promising aspect of the blockchain space that is still in its infancy. Speculators, developers, traders, and investors have jumped into the DeFi craze to capture some of its potential. The purpose of this segment will be to break down what DeFi really is and what it can offer in the coming future.
Like Bitcoin, grasping DeFi isn’t always clear or intuitive. If you understand that Bitcoin is decentralized, meaning it does not require a 3rd party to transact, DeFi is similar in that it allows traditional finance to function without a middleman, institution, or intermediary. DeFi works on top of the blockchain and is almost entirely being created on the Ethereum network. Smart contracts created on the Ethereum network are the core of what DeFi truly is. These contracts don’t require a middleman to ensure the contract is trusted and fulfilled, allowing finance to function in a way never seen before in history.
DeFi has the capability to accomplish just about anything in traditional finance, from earning interest, to collateralized debt positions to raising capital etc. Banks have historically dominated the financial sector, yet haven’t done any favors to the majority of their customers. DeFi strips the power away from banks. Even more disruptive, DeFi breaks the barriers of entry to traditional finance, opening the gates for anyone to participate. An easy way to start participating would be searching for a DeFi exchange to earn interest on a crypto loan. This is a good place to start searching where you may begin in DeFi https://defirate.com/dex/. Our team uses Voyager and BlockFi to hold coins and earn interest.
The catch to all the great aspects of DeFi is that it still has a long way to go. Many people don’t understand it, so taking advantage of it can be risky and confusing. Luckily, if you made it this far you probably understand something about crypto, so taking on DeFi is just one more step. In DeFi, investors run the risk of losing their investment because they must loan in order to earn interest. Traditional finance holds similar risks – the primary change is how it is all done. If you’re new to crypto, it’s recommended that users begin their exploration on centralized exchanges before moving into Dapps (decentralized apps) and Dexes (decentralized exchanges).
Traditional finance locks up money for the banks’ benefit and use. DeFi does the same. The rate of locked money in DeFi is increasing at an exponential rate with no signs of slowing. This is just one of the many reasons everyone in the space cannot stop talking about DeFi. In theory, increased locked money means less selling and increased price.
Projects like COMP, LEND, REN and BAL have been the talk of the town, but there are under the radar projects that are contributing to the DeFi craze as well, such as ERD, PNT, and BAND. A lot of the work in DeFi will be done behind the scenes, meaning if it grows, it would simply become normalized like traditional finance with added benefits. The big question becomes whether our current financial system will adapt to this newest evolution of finance or be entirely replaced. As for traders looking to stay ahead of the pack, key trends to watch for will be how much DeFi is mentioned and grows leading into the next bull run. A lot more credibility would come with the next bull run if DeFi is a catalyst rather than another ICO craze.