Decentralized finance (DeFi) is a new way to invest your money. But what exactly does it mean? And why should you care?
Decentralized finance refers to any kind of financial activity that occurs without the involvement of traditional institutions like banks, governments, or stock exchanges. This means that instead of placing your trust in middlemen who can lose sight of their responsibility and lead to catastrophic consequences, decentralized systems are built on open-source software which eliminates this risk entirely. You control your own funds with no one else able to access them without permission from you. So not only are these systems more secure than centralized ones but they also allow for better transparency because all transactions are recorded on public ledgers known as blockchains.
DeFi applications (DApps for short) don’t follow the same rules as traditional finance apps and this allows them to be more efficient in various ways. Using these DApps you can open a loan, play with decentralized derivatives, trade your favorite cryptocurrency or bet on sports and win real money!
You probably already noticed that the DeFi trend is mainly about decentralizing finance products so they work without banks or other third parties involved. This allows you to trade assets directly peer-to-peer instead of relying on centralized infrastructure which has high fees and does not always prioritize user interests.
However, this kind of decentralized approach can be applied to other areas as well. For example, you can decentralize file storage and protect your data against cyber attacks while also paying microfees that are a fraction of what you would usually pay to cloud service providers.
The basics of decentralized finance
Although this new movement is still in its infancy, we’ve already seen some impressive results and it shows real promise. In fact, decentralized finance DeFi already has a market of $400 million which is expected to grow by more than 10x in the coming years. So if you want to get involved but don’t know where to start we’re going to show you what’s possible and how you can benefit from it right now .
1) Decentralized loans: taking out a loan has never been this easy!
Even if you’ve heard about decentralized finance DeFi , you probably didn’t know that there are now several companies which provide loans using blockchain technology. All over the world, people now have the opportunity to take out loans without needing to go through lengthy procedures or meet impossible credit scores.
How does it work?
Instead of going through a bank or other traditional financial institution, you can use a decentralized finance application to get the money you need in minutes. All you need to do is choose the right loan product for your needs and link it to your wallet that holds your digital assets. You then agree on terms with investors who are willing to fund your loan and receive the money you need in minutes.
Even though this is a very new concept, it works as advertised and several companies like Salt , SALT Lending or Dharma already offer their own blockchain-based loans all over the world .
What’s more, you can also use decentralized finance DeFi to get a better deal on your existing loans through refinancing. All you need to do is find someone with a lower credit score than you who would be willing to pay the same price for your existing loan. Then, this person will take over your debt obligations in exchange for paying you a better interest rate.
In any case, decentralized finance allows people from all over the world to get access to fair financial products regardless of where they live or the bank they’re dealing with. And it does all this without additional fees.
2) Decentralized cryptocurrency trading: invest in alternative currencies without worrying about liquidity
Although decentralized finance is still in its early stages, there are already several apps available for anyone who wants to use decentralized finance tools to get ahead. Even though these products are still in their early stages, you can already take advantage of the opportunities they offer.
For example, decentralized cryptocurrency exchanges like IDEX or EtherDelta allow you to trade your favorite cryptocurrency without worrying about what’s happening on centralized infrastructure providers like Binance . The same goes for P2P crypto funding platforms like Dharma or dYdX .
Since these products are still new, you might face some problems using them. However, they will improve as more users start to use them and provide important feedback about their experiences.
3) Security tokens
Invest in alternative assets without needing to rely on banks or brokers You’ve probably heard of security tokens but you might not know how they can be used. In fact, security tokens are becoming increasingly popular with investors from all over the world who want to use something else than conventional cryptocurrencies .
What is a security token?
In simple terms, security tokens are blockchain-based representations of real-world assets like stocks or commodities . So instead of hiring a broker or relying on banks to buy and sell assets, you can trade them on the blockchain .
To put it simply, almost anything which has value can be turned into a security token. You could turn your home into a security token which you can then use to buy other assets or even exchange for fiat currency. The same goes for items like paintings, gold ingots or even private jet planes.
4) Stablecoins: invest in cryptocurrency without worrying about volatility
Stable coins are cryptocurrencies that are designed to maintain a stable value which is pegged to another currency. For example, Tether (USDT) is tied to the US dollar while Dai (DAI) is tied to the US dollar .
Since they are designed to maintain fixed values, stable coins can be used for hedging purposes. For example, if you own Bitcoin (BTC) and want to protect yourself against price volatility, you could exchange your BTC for USDT or DAI. Then, if the value of BTC falls below the level of your stable coin, you can simply sell your stable coin for BTC and reap the rewards.
5) Dai: invest in cryptocurrency without worrying about volatility
With a truly decentralized stablecoin like DAI, we can completely sidestep many of the systemic risks attributed to centralized approaches such as Tether,” said Ryan Zurrer , principal and venture partner at leading cryptocurrency hedge fund Polychain Capital . “DAI is one of the most important tools that will help bring cryptocurrencies to mainstream adoption.”
What is DAI?
DAI was created by the MakerDao project which runs on the Ethereum blockchain. At its core, DAI is actually a crypto-collateralized stablecoin which means it is tied to another cryptocurrency. In this case, DAI’s value is pegged to the US dollar which makes it a stable cryptocurrency .
To create more DAI, you must first own some Ether (ETH). Then, you’ll have to send some of your ETH to the MakerDao smart contract where it will be locked away as collateral. By doing this, you are essentially buying DAI but are required to make an overcollateralization of 150 percent. This means that 1 dai is always equivalent to 1.5 US dollars.