Blockchain technology has revolutionised the way we think about online transactions. The financial services industry has been one of the major early adopters of blockchain technology.
Blockchain-based alternatives to traditional financial services, often referred to as decentralised finance or DeFi, have emerged as a major growth area in the space
In this section, we will tackle how DeFi works and why it is important.
Decentralised Finance Introduction
Decentralised finance, often called “DeFi, refers to the shift from traditional, centralised financial systems to peer-to-peer finance enabled by decentralised technologies built on the Ethereum blockchain.
From lending and borrowing platforms to stablecoins and tokenized BTC, the DeFi ecosystem has launched an expansive network of integrated protocols and financial instruments.
DeFi applications provide numerous benefits when compared to traditional financial services. For one, they are far more accessible, as there is no need for a bank account or other intermediaries. Furthermore, they are often available 24/7, and they usually have lower fees.
Difference between Centralised Finance and Decentralised Finance?
The goal of both centralised and decentralised finance is to allow people to utilise cryptocurrency in a wide range of financial services.
Centralised finance involves banks and other third parties who facilitate money movement between parties, while decentralised finance eliminates intermediaries by allowing people to conduct financial transactions directly.
How does it work?
DeFi applications, or dApps, run on top of the blockchain and handle transactions between users. By using decentralised infrastructure, DeFi applications are able to provide money lending, borrowing, and trading services without the need for central authorities.
This not only reduces costs but also enables users to remain in control of their own funds. The use of smart contracts further enhances security by ensuring that transactions are executed automatically and cannot be altered.
Top DeFi Projects
The world of DeFi is undeniably growing every day, here’s a few projects that stand out among others:
Aave is a decentralised liquidity platform that allows for borrowing assets and earning rewards on deposits. The platform was initiated in 2017 under the name ETHLend and is one of the original DeFi platforms on the market.
The Aave DeFi platform uses the AAVE token to provide price stability and discounts to users who stake their tokens on the platform.The AAVE price has been rising in recent months and staking AAVE on Aave may be a good way to earn some additional income.
Launched in 2015, Cardano is a decentralised public blockchain and cryptocurrency project. ADA, the native token of the Cardano blockchain, is often referred to as the “Green Blockchain” due to its impressive energy use reports and proof of stake protocol.
The ADA staking process is more energy-efficient than the proof of work consensus algorithm utilised by popular blockchains like Bitcoin and Ethereum.As a result, ADA price has surged in recent months as investors seek out cryptocurrencies that are more sustainable in the long run.
Launched in June of 2017, the Chainlink network is a decentralised oracle network that provides reliable, tamper-proof data inputs and outputs for smart contracts on any blockchain. The Chainlink network is powered by LINK, a native ERC-20 token that is used to pay node operators for the provision of data and services.
LINK is not currently listed on any major exchanges, but it can be purchased on a number of smaller exchanges. The LINK price is volatile, and it has been known to fluctuate by as much as 10% in a single day.
Founded in 2017 by Silvio Micali, Algorand is a decentralised blockchain network that provides an extensive range of secure, systematic and adaptable applications. Created for the financial future and the first pure proof-of-stake (PoS) fundamental blockchain in the world.
The Algorand blockchain is an open source project managed by the Algorand Foundation and is funded through a combination of inflation and fees levied on transactions conducted on the Algorand network. The algorand price is set by the market and updates in real-time.
The Pros and Cons of DeFi
Rather than entrusting your money to a central authority, you can use DeFi protocols to hold and manage your own crypto assets. This not only gives you more control over your finances, but it also opens up a world of new investment opportunities is one of the advantages in DeFi.
Despite the potential rewards of investing in DeFi protocols, there is also a significant amount of risk involved. DeFi is unregulate which means there is no government agency like the FDIC to back your funds in case of a major error or hack. This also makes it difficult to recover your funds if they are lost or stolen.
In a Nutshell
When it comes to investing in emerging industries, it is important to understand both the potential rewards and the risks involved. Early investors in a new industry can often see outsized returns as the industry grows.
It is important to note that there is no DeFi protocol without risk. However, by considering the above factors, you can evaluate the investment risk before putting your money into any protocol.
By understanding the concept of risk and return, you can make informed decisions about which protocols to invest in.