Crypto Stories

Here’s Everything You Need To Know About DeFi And How To Invest In It  

By Parasshuram Shalgar
Published December 29, 2021 Updated February 2, 2022

In recent years there has been more and more talk of Decentralized Finance, also known as De-Fi. These are very different concepts from those we are used to because it represents a real revolution of traditional centralized finance, opening the doors to innovative technologies, autonomous and secure services, advanced financial applications, and much more.

Decentralized finance is often linked to cryptocurrencies, but in reality, there is much more behind De-Fi, and cryptocurrencies are just one of the innovative aspects introduced by the new form of finance. This guide will help you discover what decentralized finance is and how it works, and above all, why it could represent the finance model of the future.

What is Decentralized Finance

Decentralized Finance, or De-Fi, is an innovative financial system based on autonomous infrastructure, free from intermediaries and central banks. The purpose of decentralized finance is to offer classic banking services but without the control of banks, relying on decentralized systems such as blockchains using smart contracts and relying on cryptocurrencies. But decentralized finance is also defined as a socio-economic movement that uses reliable decentralized digital systems.

Defi ecosystem allows you to carry out many operations, such as exchanging digitized assets and tokens and applying for loans or deposit tokens to obtain interest. This innovative decentralized financial system was born together with the first cryptocurrency, Bitcoin, in 2009 and has grown dramatically since then.

To date, the decentralized finance economy is worth over 100 billion dollars, counting over 100 projects, of which about 90% exploit the Ethereum network. The birth of decentralized finance is also attributed to the creation of MakerDAO and its platform that allowed users to exchange money in the form of tokens without any intermediary.

How does De-Fi work?

Decentralized finance provides financial services and tools through a complex IT infrastructure based on public blockchains. The main feature of these systems is decentralization, i.e. there is no vertical but horizontal hierarchy. Defi protocols are mainly based on smart or automatic execution contracts that do not use intermediaries. Consequently, centralized finance also exchanges values through famous cryptocurrencies or tokens.

The main areas of Defi applications concern: the provision of loans, derivatives and asset management instruments, exchanges (or exchanges) of (traditional) fiat currencies or cryptocurrencies, and commodities and trading items and payment systems.

Advantages and Limitations of Decentralized Finance

It’s not hard to spot the benefits of decentralized finance, including:

  • Absence of intermediaries and central bodies (e.g. central banks)
  • Transactions are anonymous to ensure user privacy
  • A very cheap system with no withdrawal fees
  • Resistant to censorship
  • A transparent system with mostly popular government
  • It offers income opportunities for people excluded from traditional finance
  • It is constantly innovating with new platforms and new innovative services
  • There are, however, some risks to consider in decentralized finance, such as:
  • The high risk of loss as with any investment
  • It does not provide legal guarantees
  • Slower transactions than traditional finance

Token De-Fi: What is Tokenization

It is practically impossible not to even talk about Blockchain Applications and tokens when it comes to decentralized finance. It is also not uncommon to hear about tokenization, which is nothing more than the process that converts a real asset into a token by placing them on the blockchain, acting as fuel for the network.

Each object is assigned a token during this conversion process or transformation, which can then be managed within the Blockchain Application. Consequently, taking ownership of that token also means taking ownership of the object represented by the token itself.

How to Invest in De-Fi?

Investing in the Defi ecosystem means relying on the cryptocurrency that powers the system. Consequently, it is possible to buy tokens on the appropriate exchange platforms and online brokers to invest in decentralized finance. Many brokers offer this opportunity and at particularly convenient conditions. Users can buy many cryptocurrencies on these online platforms simply by exchanging them for fiat money and keeping them safe in their wallets.

Forecasts for the Future

Decentralized finance is drawing attention to itself every year, increasing its success. It is not difficult to hypothesize that De-Fi could become the finance of the future, but there is no shortage of criticalities.

Defi protocols concerning security and the absence of guarantees make its finance too vulnerable. Consequently, the true development of this ecosystem needs major improvements, but the premises are more than good. You must remember that what you are experiencing today is only the embryonic phase of a project that evolves from month to month.