Reshab AgarwalDecentralized Finance is the future, and its growth shows us why. The entire market cap of the industry has now surpassed $100 Billion and continues to grow with increased usage. This makes the number of assets locked up in the space worth more than the entire market cap of Coinbase. With their shares trading at an average price of $295, the market cap of the company is $59 billion. On the other hand, according to the reports from CoinGecko, the total market capitalization of DeFi is estimated at around $128 billion. But What is DeFi? And why do crypto experts say that it is the future?
What is DeFi?
DeFi stands for Decentralized finance. The word decentralized means that it is not being regulated or managed by any central entity. The technology is based on blockchain and is also used as the basis of many coins being traded like Uniswap and Safemoon. In a DeFi, the transactions are held by several entities that hold copies of them and verify and process them too. Due to this nature of the system, it is much faster than centralized systems and is also more reliable.
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Just take an example of a payment method that is centralized like the banking system. Let’s say you are sending moe to your friend, and due to some reason, the bank decides to block your payment because they have the authority to do so. But in the case of DeFi, that won’t be possible as no one will have the authority to block your transactions. In fact, the number of transactions that a bank or any other centralized system can process at a particular time is limited, but as adoption increases, the pace at which transactions will happen will get quicker due to more systems for DeFi. Do note that DeFi and crypto are different subjects. While the latter is more of a simple transactional item, the former has many more complex use cases and is even more practical.
DeFi Applications and in-depth use cases
When we talk about Decentralized finance, there are a lot of things that come to our mind. The first and foremost one is crypto. And yes, more or less, both are correlated. We can go about this, saying that DeFi takes crypto and blockchain and puts it to real use. And this is why it is considered so important in the industry. Have you noticed that the price of Ethereum has been increasing without any break? Yes, DeFi has a role to play in that. Since a lot of DeFi applications are based on Ether, its increased usage keeps more Ethereum locked up in the ecosystem. Let’s take about some popular DeFi applications to understand how it is used.
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1) Lending
You take loans from banks, and now you can do the same with DeFi. The best part about this is the fact that it will allow you to skip right past the banks and save a lot of time and cost. Student Coin is one interesting solution for this that lets you make DeFi tokens to raise student loans in the open market.
2) Predictions and betting
Yes, you can even use DeFi to bet on outcomes. This bet could be on a soccer game, a basketball match, or even an election. The point is the DeFi can be designed to give rewards to people who take the winning side. But here, there are no brokers or any kind of intermediary body present, which makes the entire transaction faster, smoother, and, yes, less costly.
3) Decentralized exchanges
Have you ever wondered that why there is a price difference in crypto on two different apps? This is because even though the crypto is decentralized, the medium used to trade them is not. Yes, I am talking about the exchanges. But now, DeFi has entered this space, too, by connecting users directly with the users wanting to sell their tokens. In this way, there is no intermediary, and one can save the transaction costs, price differences, and more.
4) Smart Contracts
DeFi has also given rise to the concept of Smart Contracts. Traditionally, one can make a deed into a contract enforceable by law. But in smart contracts, it is automatically executed and has not failure rate. For example, A contract is made between two friends Amy and Sheldon, saying if Team A wins the Sheldon pays $1000 to Amy and vice versa. So, in this smart contract, $2000 dollars will be locked, and as the outcome comes, the contract will pay whoever wins the bet.
All this doesn’t make DeFi risk-free!
Even though there are a lot of use cases of DeFi, we need to understand that investing in the same can be risky. The term DeFi is an abstract for a project using blockchain technology. You might think that investing in such technology can give you huge returns, and that’s true. But for that, one needs to invest in projects that are successes. There are always good and bad sides to things, and it is obvious if you invest in something shady, it might be a failure.
Another important thing is that even though people think that DeFi has huge growth potential, the market is still very new. We need to understand that unless it matures and goes mainstream, there is a huge risk factor associated. But as investors, the risk to return ratio is what people need to look at, and that is great here. This is why it is a risky but good investment.
Just consider the fact that in the last 4 months the total locked value in Ethereum has increased from $15 billion to $66 billion. And this does show that the growth rate is immense in the sector. Only if the industry manages to go mainstream we can expect huge returns from investments made in the same.
How has DeFi gotten so big?
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Ethereum has a huge role in this, and the total value locked in its smart contracts has been increasing every day. According to a report, the total value locked in Ethereum is at $66 billion, which is 4 times the amount at the beginning of the year. And another major Defi platform, Pancake swap, also has about $38 billion locked in the same. Nowadays, even funds are using Ethereum DeFi solutions and smart contracts more than traditional systems.
All DeFi platforms are seeing fast and steady growth in the total value locked in them. And at the same time, the number of users is also increasing in the space. Reports from the Dune Analytics team suggest that over 2 million wallets have worked with DeFi protocols till now. Even now, most people participate in DeFi through exchanges and hold them in their wallets, and therefore, the number of wallets doesn’t have to specifically the number of users the market has. Some of the popular Defi even you might be trading are Uniswap, compound, and SushiSwap. And even these are slowly increasing in price and getting a good amount of fees daily from transactions.
So what’s the conclusion? Should I invest in DeFi?
Well, even though the final decision is of the investor and one must do their due diligence before taking any decision. It is important to note that investing in good projects can produce high returns in a short period of time. Investing in popular choices like Uniswap is a very safe option. But investing in lesser-known but promising projects is not a bad idea either. The ultimate thing will be to consider the risk to reward ratio and deal with it accordingly.
Considering that DeFi seems to have a good future ahead, it will be unwise to completely tread away from the investment. At the same time, one should not allocate their complete portfolio to the same. It will be better to have a reasonable allocation based on your risk appetite to this booming sector.
What are your thoughts on the huge growth of DeFi in the past few months? And do you think it is actually the future of finance? Let us know in the comments below. Also, if you found our content informative, do like it and share it with your friends.
Also Read: Mercado Libre, South America’s second-largest company, now accepts crypto payments.