Decentralized finance, often abbreviated to DeFi, is a new type of digital system that is generating a lot of interest within the crypto community and beyond.
Today, the decentralized finance sector has more than $4 billion in crypto assets and is shaping the future of digital finance.
What is DeFi and what distinguishes it in the blockchain world?
DeFi applications, or dApps, operate on blockchain equipped with smart contract and offer all the advantages of a peer-to-peer network.
Democratizing the financial sector, dApps are accessible to everyone with an Internet connection. Since they completely eliminate intermediaries, not only are they highly convenient for users, but they can also afford to serve those who were previously excluded from the banking world.
There is no single body, such as a government, a financial institution or a company that controls or intervenes in the circulation of assets. Moreover, through tokenisation, those who have only small amounts to invest can get a slice of the cake, since the purchase of negotiable tokens allows the owner of the currency to buy a part of a larger investment that he could not otherwise afford.
They are fully automated systems that do not require human intervention and are able to circumvent unnecessary bureaucracy. DeFi apps are characterized by speed, efficiency and security ensured by robust encryption.
They use smart contracts to execute transactions in the blink of an eye, activating instantly as soon as the preset conditions are met. Using open source code, they are totally transparent, and publish transactions on the network, so that they can identify the DeFi service with the best rates and verify their reserves.
However, the factor that distinguishes DeFi from other blockchain solutions is its incredible versatility. It is making a fundamental contribution to the financial sector, changing the way we do business online.
The wide range of operations allowed by Bitcoin Evolution includes lending, insurance, custody and trading of digital assets, just to name a few.
How can I make money with DeFi and what kind of profits can I expect?
The most requested points are those that interface directly with the user’s crypto wallet, to allow him to borrow funds or earn interest by lending his capital.
These applications are exploited by the so-called ‚yield farmers‘, crypto currency holders who use DeFi technology protocols to provide liquidity in exchange for high profits.
Yield farmers lend their funds to a DeFi application, which will use the money to feed its operations, possibly through trading or by lending the funds to another user. This allows dApps to offer exceptionally high interest rates.
Compared to traditional investment channels, the advantages of DeFi are obvious. A bank will pay on average 0.1% interest per year; a bond, although low risk, will offer around 5-6%; equities can offer around 10%, but with greater exposure, and real estate can offer a return of around 10-12%.
However, this involves a large initial investment, a long and complex bureaucracy and a number of expensive intermediaries. Also, if your funds are already in digital currencies and are simply stored in a regular crypto wallet, then you won’t earn anything waiting for your currencies to go up in price.
Otherwise, your annual percentage return on your crypto investment in DeFi applications can be much, much higher. Also, because dApps are fully automated, you can earn a constant passive income, without having to waste a moment of your time following the markets and managing your portfolio.
What are the potential dangers of DeFi?
The pros of using a DeFi application are undeniable, but there are some serious negative aspects to consider. No form of investment is completely safe but dApps, as blockchain based protocols, involve some unique risks.
For example, a significant risk of DeFi applications is that many offer loans with exceptionally high collateral requirements and overwhelming conditions, such as total liquidation, with the loss of all capital if the price of the currency in which you paid your funds falls below a certain threshold.