What is DeFi and why does it matter?

What is DeFi in crypto?

DeFi (decentralized finance) is an ecosystem filled with financial solutions that utilize autonomy to complete tasks. Therefore, no intermediary has any presence or responsibilities.

DeFi applications are based on their smart contract — these are programs that automatically execute events and actions.

As DeFi is run on decentralized blockchain code, it avoids the expenses traditional finance products need to operate, such as electricity, office buildings, and employees to conduct the financial tasks.

DeFi protocols are deployed onto smart contract platforms and thus, are entitled to no operating costs. Decentralized protocols are built to be fair, open, and transparent to everyone.

Why DeFi matters in crypto?

There’s more to DeFi than just being a blockchain alternative to modern finance. The features it offers prove superior to traditional finance, and investors are starting to notice.

Here are 4 reasons why DeFi is necessary for our world today:

DeFi protocols give everyone access to financial products

Borrowing and lending are at the root of decentralized finance. It’s the initial layer most DeFi projects are built upon as users can participate in financial incentives without any discriminatory conditions. As you’re aware, you need a credit check to be eligible for a loan.

DeFi loans are collateral-based — you only need to back your loan amount with crypto.

Plus, borrowing crypto to receive interest (known as generating yield) is a fast-forward process too. Popular DeFi platforms only require you to deposit your crypto, and you’ll immediately be earning interest.

DeFi coins provide unbeatable returns

DeFi also makes its convenient experience worthwhile due to the returns and rates it offers. Anyone in DeFi can easily earn over 10% APY (annual yield percentage) in minutes and get paid weekly. Plus, a 10% APY is enough to beat the inflationary rate for most fiat currencies.

According to the Federal Deposit Insurance Corp, the average APY saving accounts yield is 0.08%. Meaning $100,000 saved will give you an $80 return in a year. A 5% APY DeFi product provides a bigger return in just one week.

What makes DeFi tokens unique is their potential?

You can earn substantial APY from a token’s yield and yet, benefit from the token’s growth in price. For example, Yearn Finance is a yield aggregator — a protocol that automatically looks for the best DeFi yields so you can reap maximum profits. From July to September (2020), it grew astronomically from a few dollars to over $40,000.

DeFi yield farmers can also opt to take the less volatile route by choosing to earn interest from stablecoins. What are stablecoins? These are cryptocurrencies pegged to another financial instrument to maintain a predictable value. For example, USDC is a stablecoin representing the value of 1 dollar, and KGLD (Kitco Gold) is a stablecoin backed by physical gold and represents the real-time value of gold.

DeFi synergizes with web 3.0

The amalgamation of web 2.0 technologies has created an environment where companies and institutions can monopolize their users and their information for their own gain.

Facebook compiles user data so advertisers have information on audiences to target. The users providing this information aren’t rewarded for doing so. Twitter operates the same. Web 3.0 is here to disrupt this by creating an open economy where users own their data and are rewarded for their participation.

DEIP Token, for example, is a DeFi project that focuses on an interoperable creator economy protocol. As it’s clear that web 3.0 is growing in presence and we’re still in the experimental phase, the DEIP protocol creates an order within the experimental chaos for users to build dApps and tokenize high-value intangible assets.

With DEIP, users can create better alternatives to apps like Instagram and Reddit. They can also turn their intellectual property (patents, copyrights, trade secrets) into F-NFTs and generate a yield from it.

DeFi is at the root of DAOs (decentralized autonomous organizations).

DAOs are essentially decentralized companies where there is no hierarchy — communities democratically control the direction of DAOs via voting with governance tokens. DeFi protocols enable DAOs to autonomously perform the tasks traditional companies require employees for such as payroll and account management.

DeFi projects are evolving finance

Traditional finance has hit the wall. It can’t improve as the technology behind it is limited. As DeFi is continuously growing, we get to witness new financial innovations every year. Such innovations are reinforcing DeFi’s prominence in the economy and could soon change how the average person interacts with finance on a daily basis.

DeFi projects have created decentralized reserve currencies that can yield an APY of over 5,000%.

DeFi projects have created crypto-based index funds for users to invest in crypto portfolios so they can mitigate risk.

DeFi projects are creating a decentralized P2P (peer-to-peer) bond marketplace that allows anyone to issue a bond using their digital asset as collateral.

So, making a long story short…

DeFi is essential to the future of finance and apps. Its successful track record proves that it’s here to stay. DeFi definitely matters!

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