Is DeFi The Future – How Americans Can Ride and Profit From The Wave of Decentralization
Decentralized finance (DeFi)is changing the financial landscape as we know it. But is DeFi the future, or is it a passing fad?
Decentralized contracts have recently grown by 60% to $11.1 billion, and there’s no question this revolutionary technology is here to stay. DeFi is on track to outpace traditional finance, thanks to its safer transactions and lack of third-party interference or market manipulation.
This technology has already shaken up the traditional finance world and shows incredible promise for the future. Let’s take a closer look to examine DeFi and how you can profit from this decentralization trend.
What Is DeFi and How Does it Work?
Decentralized finance is the opposite of traditional finance. Where standard financial agencies and brokerage firms require a degree of privacy, federal oversight, and regulatory practices, the future of finance potentially lies in transparency and peer-to-peer (P2P) exchanges.
Previously, the only way to pay for goods and services was to withdraw money from your bank account (either in cash or through a credit or debit card) and give it to the person you were paying. This always required a financial institution (a bank) to oversee the transaction. With decentralized finance and peer-to-peer transparent contractions and transactions, the power returns to the people.
Public blockchains allow everyone involved in the transaction to be accountable and valid users, eliminating a single control point or third-party interference. Investors drive the market without external manipulation and have an unalterable history of every associated transaction to ensure validity.
Is DeFi the Future?
One of the most vital points of DeFi is its seamless, borderless, and verifiable transactions that occur in real time. The decentralized financial model helps create more efficient global financial services and has already reduced distribution and manufacturing costs worldwide.
Transactions in a traditional finance setting require approvals and time. DeFi protocols allow P2P users direct access to their finances to distribute their funds more readily without regard for currency exchange rates. For instance, Ethereum blockchain and Bitcoin transactions are immediate versus an investor or broker who must draw funds from centralized banking and then wait due to regulations that often prohibit instant access.
DeFi also opens avenues for investors who may have difficulty obtaining loan approvals. Banks and financial offices often require high expectations or credit scores for collateral. Crypto has its own online buying power versus a limiting (sometimes vilifying) credit score.
While banks or financial services often offer separate accounts for savings, checking, retirement, or brokerage with minimum balances or fees attached, DeFi does not require any centralized regulation to transfer between accounts.
DeFi also attracts more users because of its low fees and high-interest yields, allowing investors direct negotiation power to determine rates and loans.
DeFi and Crypto: What’s the Difference?
The difference between DeFi and cryptocurrency is that crypto is the currency for DeFi transactions. While DeFi lets users to conduct monetary transactions online without third-party reliance, cryptocurrency (such as Ethereum and Bitcoin) is the digital currency used for those transactions.
Challenges of DeFi
While DeFi has proven to be more popular, lucrative, and profitable in recent years, it also presents a few challenges.
DeFi as a financial system can pose a steep learning curve for novices. Often, the end user must understand and navigate its complexities before finding true success.
As with any online transaction, DeFi is also not immune to inherent risks due to scams, fraud, or market volatility. The skyrocketing value of crypto in early 2021 drove investors into a frenzy, only to find their gains diminished with the crypto crash in May 2022 with an overall loss of $2 trillion in value.
In addition, many government entities and financial institutions have a perception that most DeFi transactions are illegal or suspicious. (And yet, Swiss Bank and Cayman Island accounts have been protecting private investors’ assets for decades without raising many eyebrows as to what transactions generated that income.)
Many financial service investors believe DeFi to be the current popular trend, but say it lacks the staying power of traditional finance. Those advisors suggest that DeFi’s reliance on “bucking the system” poses issues to security and stability.
The solution most DeFi proponents suggest is to have a high level of global regulation, standardization, and governance to reduce volatility, heighten security concerns, and increase public confidence.
Regardless, decentralized finance is making waves in the current market, and financial institutions and governments now realize its potential by either clamping down on earnings via taxation or creating their own avenues to this exciting technology (as with the case of China’s digital yuan).
How safe is DeFi? The answer is “Extremely.”
No outside party can alter a blockchain, so it is immutable. The blockchain is a complete record of every transaction for viewing and verification that still assures your anonymity.
DeFi transactions are also immune to bankruptcy and adversity due to their independence from centralized institutions or banks for processing.
When 2021 saw approximately $10 billion lost in DeFi, investors created DeFi insurance as a subsequent necessity. Joining a DeFi “pool” added an extra layer of protection for your assets against fraud, hacks, or price drops.
How can ordinary investors get in on the future of decentralization and use DeFi to turn a profit? One answer is DeFi staking.
DeFi staking locks your crypto assets with the intent of creating passive income. Staking requires proof-of-stake networks where validators (the principal stakers) approve transactions, making the process and your assets much more integral, secure, and liquid. DeFi staking allows users to earn passive income, obtain a better ROI than standard financial accounts, and provide direct interaction with a project or asset while maintaining a high degree of security.
Users place crypto into a smart contract that enables them to claim “staking rewards” to maintain ownership and network security.
A typical asset of DeFi staking is NFTs (nonfungible tokens), and they encourage investors to hold their investments to earn higher interest on them. In one of the most lucrative examples, Twitter founder Jack Dorsey created and sold his first tweet as an NFT in March 2021 for $2.9 million.
Staking can lead to higher yield investing than traditional savings, but it is not without risk due to its volatility (for instance, Dorsey’s NFT has since lost most of its value in the past year, with a sale with the highest bid last April being a mere $280).
Investors find this avenue the most promising since it requires no trading or technical experience.
To answer the question, “Is DeFi the future?” you only have to look at how many reputable DeFi platforms have risen up to meet consumer demand. Similar to a broker or financial advisor, DeFi platforms come in the form of mobile apps or software that facilitate online DeFi transactions. Many are free and available to anyone with internet access, requiring only an online wallet to access funds and make payments.
Most of these platforms are user-friendly and straightforward to use, and:
- Provide a wealth of information for the savvy investor
- Generate higher interest rates than typical investments
- grant better access to loans than a traditional financial system
Perhaps the most prominent DeFi company is Coinbase. Coinbase is an ideal platform for beginners and has extended its buy, sell, or trade portfolio from Bitcoin to other well-known cryptocurrencies, such as LiteCoin and Ethereum Classic. As one of the most trusted online wallets for transactions, Coinbase has over 20 million users across the globe.
How Do I Choose the Right DeFi platform?
When choosing the right platform for your needs, consider the following before you start investing:
- Payment methods. DeFi platforms vary on how you can hold or sell crypto. Some charge fees for fiat deposits. Check the website or fine print.
- Crypto availability. If there’s a particular coin you want to invest in, find out if the app supports its trade.
- Fees. DeFi platforms all have expenses for services. Before you know it, those fees quickly eat up your assets with costs. Always check the fee scale and schedule.
- Services. Some DeFi platforms have a primary focus from lending to borrowing to trading. If you have a specific goal in mind, make sure the service aligns with your needs.
The Future of DeFi Is Bright
While there are existing challenges involved with DeFi, this technology has the potential to be a game-changer for the financial industry. With the lack of centralized banking and financial institution fees and immediate access to funds worldwide, DeFi is attracting a wide swath of investors while undermining the current traditional finance model.
DeFi is a fast-growing investment alternative, and as regulation catches up, it will become more commonplace, without the stigma that used to surround cryptocurrencies and peer-to-peer transactions. The IRS is now just catching up to taxing crypto transactions and defining them as income in 2022.
Much of the financial industry world today is trending towards decentralization (or at least standing up and taking notice of it), and DeFi is a significant part of it. Its popularity is gaining momentum and shows no signs of slowing down.
Pitfalls and hazards come with any type of financial investing, but DeFi’s future shows extreme promise. We strongly recommend finding a trusted advisor to help navigate the process and mitigate loss. If you have questions about DeFi, we can provide you with the answers.