DeFi, or Decentralized Finance, has become a buzzword in the financial technology sector.
DeFi is based on decentralized protocols, as opposed to traditional finance, which is controlled and managed by banks and other centralized entities.
This has made it a popular way for investors to get involved in cryptocurrency trading and other activities without relying on third-party intermediaries.
One of the most significant differences between DeFi and centralized, or traditional finance, is that with centralized finance, the value of a currency is regulated and controlled by a central bank.
In contrast, DeFi values are derived from the popularity of a token or coin, which can fluctuate.
How To Get Involved With DeFi As An Investment
Decentralized finance (DeFi) can be intimidating for newcomers, but anyone can join this exciting and lucrative investment opportunity with the proper guidance and knowledge. Getting started in DeFi is easier than you think.
Much like with traditional finance, there are a variety of ways to get into DeFi investing, but the most common include strategies involving:
- Yield Farming
Cryptocurrencies: Cryptocurrency is a digital asset designed to work as a medium of exchange that uses cryptography to secure transactions, control the creation of additional units, and verify the transfer of assets.
It’s decentralized, meaning any government or central authority does not issue it.
As such, cryptocurrency can be used as a form of payment, or it can be used to store value. The most popular cryptocurrencies include Bitcoin, Ethereum, and Litecoin.
NFTs: Non-fungible tokens, or NFTs, are unique digital assets representing real-world items such as art, music, and collectibles.
Unlike traditional fungible tokens like Bitcoin or Ethereum, which can be exchanged for other tokens with the same value, NFTs are non-fungible, meaning each token is unique and non-interchangeable.
Conducting a transaction with NFTs requires a smart contract to transfer ownership from one party to another.
This means that an NFT can represent ownership of a one-of-a-kind item or asset.
They are stored on a blockchain and can be bought and sold like any other cryptocurrency. Investing in NFTs can be an exciting way to diversify your portfolio, as there is no limit to what these tokens can represent.
However, it’s essential to be aware of the risks involved and only invest in NFTs if you understand the market and underlying technology.
Yield Farming: DeFi yield farming is the practice of providing liquidity to a liquidity pool and earning rewards in exchange.
It involves providing liquidity to specific automated market maker (AMM) pools in exchange for rewards, typically in the form of tokenized incentives. For example, you could deposit funds into a Uniswap pool and receive UNI tokens as a reward.
Yield farming can be an incredibly lucrative endeavor if appropriately done; however, it comes with a few risks, such as impermanent loss, which is when the value of your assets depreciates due to market fluctuation.
Staking: Staking in DeFi is a process whereby users can lend their crypto assets and handle the security, operation, management, and maintenance of DeFi protocols in exchange for rewards paid out through those same protocols.
This type of staking holds numerous benefits, such as diversifying risks, building financial autonomy, unlocking potential passive income streams, and accelerating collective participation.
By contributing to DeFi networks, users can bring value to the network itself while properly incentivizing all participants involved.
Trading: Trading in DeFi, or Decentralized Finance, is essentially the same as traditional finance but entails completely decentralizing technology, processes, and data.
With DeFi trading, you are free to choose where to deploy your funds, make decisions on how to handle them, and no middleman or centralized authority dictates what apps can be used.
Instead, users interact directly with the decentralized exchanges that allow transactions between two parties without any centralized authority. In addition to providing a high level of privacy and security, DeFi removes limitations such as geographic boundaries and enables low-cost transactions across the globe with improved scalability.
Borrowing: Through borrowing services, users can leverage positions by borrowing funds with crypto assets as collateral.
Usually, DeFi projects provide liquidity pools that users can access in order to borrow Ether (or other tokens) or even fiat currency such as US dollars or Euros.
These loans are often secured with a blockchain-based smart contract and don’t require third-party intermediaries for verification and execution, allowing for 24/7 access and a decentralized approach to lending.