What is DeFi and why is it the hottest ticket in Crypto?
DeFi or decentralized finance refers to financial services using smart contracts, which are automated enforceable agreements written in computer code that do not need an intermediary like a bank or broker. They run on an immutable public online blockchain like the technology bitcoin uses.
Blockchain or Distributed Ledger Technology (DLT) was made for disrupting traditional finance. DeFi started as the wild-wild-west of the crypto frontier. However, it’s quickly being tamed by ambitious startups looking to bring it to the masses. DeFi is the new FinTech.
Just 6 months ago some thought DeFi was a passing fad or bubble, but the majority of DeFi assets have been created since then and are still growing.
In the last year, DeFi has ballooned from around $1Bn to $40Bn in terms of total value locked (TVL) on Ethereum. We could be seeing a top forming as Ethereum fees are becoming too high for some retail traders and investors.
However, if we include other chains solving Ethereum’s issues like Binance Smart Chain, Polkadot, Polygon, and Telos, we are over $70Bn in total DeFi Market Cap – yet this represents only a tiny fraction of the $100Tn global financial industry.
Another metric showing parabolic growth is the number of unique wallet addresses holding DeFi assets.
With disruption comes resistance and some think that CeFi or centralized finance (the banks) will never allow DeFi to win. But is it really a zero-sum game? Big finance appears to be developing ways to integrate this technology into new and existing services.
When the wave is big enough the giants will either adapt or perish. This is the way – and when there is talk of increased profits in the boardroom, you can be sure they will be onboard.
Major players from Amazon to Apple and many of the big banks have been openly hiring and developing cryptocurrency services and solutions. It’s exciting to hear about a big company accepting crypto. But, do you really think they are going to stop there?
DeFi gives us the ability to create an entire digital alternative to Wall Street, but without all the intermediary cost and control. This has the potential to create fair, free, open financial markets that are accessible to anyone with an internet connection and a cell phone.
Now imagine adding the 1.7 billion global unbanked and their $250Bn into the mix. However, that’s a drop in the bucket compared to tokenizing formerly illiquid assets like real estate, rents, profits, and gold.
We are about to witness the generational type of disruption that creates massive wealth redistribution and opportunity for those ready to take advantage of it.
What can this do for me?
A flood of new money rushing in is creating investment and trading opportunities. We see huge gains previously unheard of for retail investors. Who does not wish they bought $AMZN for a dollar?
There are also the financial products themselves. Lend out your crypto to earn interest and rewards by the minute and not the month. Earn at 10% instead of the meager half percent that the best traditional savings accounts have to offer.
There are some great apps like Blockfolio (now FTX) already available doing all the tech stuff in the background. So, you just need to make your deposit and let it happen. Note that most of these require KYC (Know Your Customer) and require you to provide identification.
Another way to realize even bigger gains, access lending, borrowing, and decentralized trading, all while remaining pseudonymous, is to interact with the blockchain directly – also known as Web 3.0 and requires a special browser/wallet.
The draw of high APRs in yield farming and staking is hard to resist. Further down the rabbit hole we find rebase tokens and NFTs (Non Fungible Tokens) being used in DeFi. You thought NFTs were just for art? NFTs are used to represent insurance policies, bonds, securities, real estate, and all kinds of collateral.
Related: Yield Farming with QuickSwap
This can all sound a little overwhelming at first and we are just scratching the surface. But do not worry… It gets easier and we will dive into all this in future articles.
Get started with DeFi
The first thing you are going to see when you try to interact with a DeFi app or a popular DEX (decentralized exchange) like Uniswap, 1inch Exchange, or PancakeSwap is a button to connect your wallet.
Related: Storing Bitcoin and Crypto
Start by installing Metamask and becoming familiar with it. Create a wallet (or two) and send some small transactions. Lots of people use it and you will find many willing to help.
Related: Metamask Wallet Safety
There are many wallets to choose from. However, Metamask remains the popular choice for DeFi and you should learn how to use it safely. It is a simple but powerful piece of software in our Web 3.0 toolkit. It is also very unforgiving if you make a mistake.