The advent of blockchain technology has led to several disruptions in the financial sector. The approach is unique, rewarding but presently risky to a very large extent. To individuals that have made massive profit in it, it is all good and to those who had lost fortune; it is often considered a bad investment or financial instrument.
Before you start making your own opinion and idea of what DeFi is or is not, it is important for me to bring to you important issues that are often neglected by either enthusiasts or professionals in the DeFi world. As a correspondent for The Latest Block, I am passionate about bringing you insights into important issues, whether you are a newcomer to cryptocurrency or a professional investor. In this article we are going to discuss reasons why investors are attracted to DeFi, despite recent volatility and crooks within the space.
What is DeFi?
According to investopedia.com Decentralized Finance (DeFi) is an emerging financial technology based on secure distributed ledgers similar to that of cryptocurrencies. It removes the control that banks and institutions have on money, financial products, and financial services. From its inception in August 2018, decentralized finance is a ready non-custodial monetary products, which includes sending, receiving, lending protocols, decentralized stable coins (cryptocurrency tokens whose cost is pegged to an ordinary asset, such as the US dollar), and decentralized exchanges.
It was born out of unsatisfactory performance of traditional financial systems coupled with innate desire for everyday people to gain access to financial markets on an equal footing. The use of blockchain protocols enables this.
The Ethereum network was the first blockchain protocol that allowed decentralized applications to run on it, and the first DeFi application emerged on Ethereum. Not only that, but the introduction of smart contract and tokenization opened up capabilities to adapt most of the traditional financial system‘s activities on the blockchain.
For instance, on most DeFi platforms, lending, staking, farming, borrowing, trading of assets, swapping of one asset and derivatives to another are few of the activities that have been thriving in the DeFi world. With this, come opportunities for the unbanked to be banked. And it is for this reason that adoption is expected to increase in the near future.
Currently, Ethreum, Aave, Terra, Avalanche, yEarn, Synthetix, compound, 0x Protocol, Curve, Index Cooperative and Project spectrum are few of the DeFi protocols on chains that have been thriving. On these chains there are different individual needs. Apart from this, existing traditional financial activities are now being executed as DeFi protocols. For instance, on the DeFi media outlet defiprime, there are several insurance protocols. This enables individuals to decide what protocol would fit into their budget and purpose of having insurance. As at 1st of February, insurance.io, decentralized multi-chain platform has over 103 protocols protected, $33.7M total value locked and 213.9M total value covered across all chains.
Also, the Decentralized Autonomous Organization (DAO), a decentralized leadership system also integrates DeFi into its protocols.
According to Business Insider, the total value locked in DeFi on the Ethereum blockchain alone had increased to nearly $200 billion as at November, 2021 from about $20 billion in 2020. This to a large extent seems to be an incredible growth within a short timeframe, but since it is still at adoption stage, there is a need for mainstream investors to buy into DeFi. For most investors, profit is the major deal.
What is DEGEN?
When you hear the word DEGEN, it refers to degenerate. The term is slang for investors who make high risk trades with the goal of making the highest return on low capital investment. For three reasons, it is never going to be possible for traditional financial systems to match up with the DeFi rewards now and in the future.
First, because the banking system was designed to keep ordinary individuals out of financial freedom. For instance, as I was writing this article, a notification dropped on my phone on 1st of February and it was a debit notification from my bank for maintenance charge for the month of February. You see, the system was designed in favor of an average citizen; it was designed to milk us dry. Hence, this is not DeFi.
The second reason is that inflation keeps decreasing the value of fiat currency yearly. In some countries, the current effect of inflation on fiat currency has been catastrophic. According to a report from tradingview.com , Lebanon’s annual inflation rate jumped to a new record high of 239.69% in January of 2022 from 224.39% December 2021. The ripple effect of this on Lebanon’s economy is that the market price and cost for health, building, equipment, logistics and routine maintenance shoot up. This is so because the Government keeps printing more fiat currency which keeps losing its value. This is not DeFi.
The third reason is that the incentive and reward for participation is not encouraging as it is not uncommon for DAO to have more than 500% APY returns. This is not DeFi.
Nevertheless, with such high rewards comes high risk. In fact, in DeFi, there have been several cases of rug pull and honeypot cases. According to fool.com, on-chain analysis revealed that over $14.8 Billion in cryptocurrency was stolen in only 2021 and of which DeFi protocols are the center of focus.
The direct effect of this is that early adopters became liquidated or “REKT” (slang for financially ruined) while the indirect effect is that, DeFI enthusiasts and potential adopters would continue to lose interest in DeFi. With this, there is a possibility of success for a long time for those who will not give up on the DeFi irrespective of their loss majorly because of their understanding of the Risk Management 101 which says, “Invest Only What You Can Afford to Lose.”
Personally, having shared my experience with Wonderland DAO here, I would encourage our readers to stick to this rule.
Thanks for reading to the end.
For more educational content from The Latest Block, subscribe to our newsletter here.
References
https://www.wealthsimple.com/en-ca/learn/how-does-defi-work
https://101blockchains.com/top-defi-protocols/#prettyPhoto
https://defiprime.com/insurance
https://app.insurace.io/Insurance/BuyCovers?referrer=1346505268295495491114991223717367640099680672929
One Response