WTF is DEFI? The 2020 guide to DEFI.
The term DEFI has been getting a lot of attention lately. But WTF is DEFI anyway? DEFI stands for decentralized finance and is basically a term referring to a variety of blockchain protocols with alternative financial products fully based in crypto, by alternative I mean these financial services are essentially an alternative to the current financial industry services such as savings accounts, loans, and online brokerages, all of which are based on fiat (cash). The vision of DEFI is essentially to replace the current financial system with a fair, transparent, and globally accessible system built for the many, not for the few, DEFI is essentially Finance 3.0.
DEFI is essentially an aggregate of blockchain networks with one thing in common; providing decentralized financial services, which means free of intermediaries, and fully operated on computational logic, this significantly reduces the cost and barriers of entry to financial services as well as the human conflict of interest. Anyone, at any time, anywhere in the world can use DEFI. There are many financial services you can use in DEFI, from payments to insurance. The main services are outlined below.
Borrowing: You can borrow money in DEFI at competitive rates, whether that’s with crypto or stablecoins (cryptos pegged1:1 to fiat money).
Lending: You can also loan money in DEFI to people who borrow money, just like you lend your bank through your savings account, the main DEFIrence. 😉 is that DEFI offers rates that are way higher than your bank’s savings account.
Staking: Staking is a way of validating transactions on a blockchain network by holding a stake of crypto from any blockchain network that is classified as POS (proof of stake), you are then rewarded depending on the size of your stake for holding on to that crypto, similar to shareholder dividends.
Trading: The DEFI ecosystem is packed with DEX (decentralized exchanges) meaning they have no human intermediaries, this means you get to trade almost directly peer to peer and at low fees. These exchanges are fully run on computational logic instead of people.
There is a long list of novel decentralized financial services that DEFI offers, however that long list will be in another article.
The performance of DEFI in 2020
During the first three quarters of 2020, DEFI tokens had a spectacular rally reminiscent of the 2017, crypto bull run with some tokens posting triple and quadruple-digit rallies, however DEFI tokens crashed in September and have been trending downward ever since.
The chart above is the FTX DEFI perpetual futures index which aggregates major DEFI tokens.
The total value invested in the DEFI ecosystem has climbed to $10B USD in 2020, up 2000% from the beginning of the year where it stood at $500m USD.
DEFI is a novel area in the crypto industry and developments continue to emerge, these may have actual use cases in the future, however at this point there’s more developments and ideas than actual products that solve problems for users, this does not mean one cannot profit from this new promising crypto ecosystem. Indeed investment opportunities are plentiful and one may reap the rewards of getting early into the future of finance.
So…. how do you profit from DEFI? That’s the topic of our next article.