Decentralized finance, also known as DeFi, has brought tremendous growth to the Finance industry. This article looks specifically at the benefits of DeFi for Crypto Investors.

What is DeFi?

Decentralized Finance, or DeFi, combines existing blockchain technologies and auxiliary services to create a financial ecosystem that can work without banks, brokers, exchanges, and other intermediaries who usually manage and process financial services.

One of the most essential parts of the DeFi technology mix is smart contracts, lines of code put into the blockchain.

They write down the terms and conditions of contracts, keep an eye on them, and automatically execute a contract when its terms and conditions are met.

Smart contracts can, for example, keep track of loan deals and release collateral when the loan is paid back in full.

They can also manage drought insurance policies for farmers, which pay out immediately if the agreed-upon amount of rain doesn’t fall.

Payments, loans, trades, investments, insurance, and managing assets are all standard services that DeFi sites offer.

The list grows quickly and gives a tantalizing glimpse of a new age of crypto-based innovations, such as decentralized exchanges, synthetic assets, and flash loans.

DeFi intends to democratize finance by replacing old, centralized institutions with peer-to-peer connections.

This connection can provide a broad range of financial services, including ordinary banking, loans, and mortgages, as well as complex contractual interactions and asset trading.

Decentralized Finance (DeFi) is an umbrella term for different blockchain apps and services that aim to replace the traditional financial system with one that doesn’t have a central authority.

Stablecoins connect the DeFi and organized finance worlds because they are tied to “real-world” assets.

The core of the system is made up of smart contracts, decentralized apps (dApps), and blockchain technology.

Some different protocols and services let people connect to the DeFi world. There are various ways to keep track of things using DeFi tracking.

For example, a DeFi dashboard can handle and keep track of assets, investments, and financial plans. This is possible because there is more transparency.

Centralized Finance vs. Decentralized Finance (DeFi)

We will be explaining the basics of the centralized (traditional) financial system and that of the decentralized financial system below.

Centralized Finance

In centralized finance, banks and other third parties hold people’s money and help them move it from one person to another.

These banks and third parties charge fees for their services. A merchant charges a credit card, which then goes to an acquiring bank, which sends the card information to the credit card network.

The network clears the charge and asks the bank to make a payment.

Each part of the chain gets paid for the services it provides.

This is usually because businesses must pay to accept credit and debit cards.

In centralized finance, everything to do with money is supervised, from loan applications to services at a neighborhood bank.

Decentralized Finance

Decentralized finance eliminates intermediaries by letting people, merchants, and companies use new technology to make financial transactions.

DeFi uses security protocols, connectivity, software, and hardware improvements to make peer-to-peer banking networks safer and more valuable.

People can lend, trade, and borrow money using software that records and verifies financial actions in multiple financial databases. This software can be used anywhere there is an internet link.

A distributed database can be accessed from many different places because it collects and combines data from all users and uses a consensus method to ensure it is correct.

Decentralized finance eliminates the need for a unified finance model by making it possible for anyone to use financial services anywhere, no matter who they are or where they are.

Users of DeFi apps have more control over their money because they can use personal wallets and trade services made for them.

Benefits of Decentralized Finance (DeFi) for Crypto Investors

Decentralized finance (DeFi) has benefited Crypto investors in numerous ways. Some of them include;

Accessibility
Transparency
Greater control
Liquidity
No intermediaries
Autonomy

Accessibility

Decentralized finance (DeFi) is accessible to anyone with an internet connection. Unlike traditional finance, accessibility is restricted to specific places and time frames.

Transparency

DeFi uses a blockchain technology that enables it to be transparent and immutable. This means that the public verifies all the transactions and smart contract codes.

This feature reduces the risk of fraud and manipulation in using decentralized finance by Crypto investors.

Greater control

Crypto investors using DeFi have complete control over their assets. They can decide on lending, borrowing, and trading without relying on a third party.

Liquidity

In the use of decentralized finance for Crypto investors, Defi platforms offer high levels of liquidity. Investors can easily trade and exchange assets without significant delays or restrictions.

No intermediaries

Another benefit of Decentralized Finance (DeFi) for Crypto investors is that the need for intermediaries such as banks is eliminated from the trading process.

This feature reduces the level of expenses for fees and counterparty risks as transactions are carried out directly through the use of smart contracts.

Autonomy

The decentralized design of DeFi protocols reduces this risk because DeFi platforms don’t rely on any centralized financial institutions, which means they are immune to attacks or insolvency.

The risks of DeFi

DeFi provides new and exciting financial freedoms but are not without risk. Some of these dangers include DeFi:

Hackers are a threat
Lack of Consumer protection
DeFi technology is still developing

Hackers are a threat

Hacking is also a risk in traditional finance, but DeFi’s complex architecture with multiple potential failure points gives hackers a more significant “attack surface” to work with.

For example, in August 2021, “white hat” hackers used a smart contract flaw to steal $610 million from the DeFi platform PolyNetwork, but all the money was returned.

Lack of Consumer Protection

In the absence of regulations, DeFi has flourished. However, this leaves consumers vulnerable because they are not always protected.

No government-sponsored compensation programs for DeFi, and no regulations mandate financial reserves for DeFi service providers. The level of Collateral is High.

DeFi technology is still developing

DeFi is an emerging technology that has not been put through its paces in a large-scale, sustained stress test.

Money could be misplaced or jeopardized. For instance, a major bug recently occurred on the DeFi platform Compound, causing clients to be

inadvertently sent millions of dollars worth of Bitcoin.

Changes that Need to be Effected in the DeFi Space

Difficulties experienced by conventional centralized financial (CeFi) institutions may work in favor of the spread of DeFi practices.

However, the underlying market circumstances that sparked the current DeFi summer no longer exist.

While there is consensus that DeFi should play a significant role in the next stage of the crypto market, the details are not simple and will likely necessitate widespread adjustments to the sector as a whole.

Some of the necessary changes, among others to be made, include;

Credit
New financial primitives
TradFi bridges and real-world use

Credit

For the past few months, crypto credit markets have been under a lot of pressure. Many of the top companies in the market for discretionary loans have gone out of business or cannot work.

As a result, transparently building new credit systems has become one of the most attractive possibilities in the crypto market.

To improve credit in DeFi, you must develop new ways to give with little or no collateral.

Even though there have been some tries in this area, they are not DeFi and have been hurt by the risks of lending to market makers.

In this area, looking into alternatives that give to parties with predictable on-chain activity, like staking providers, miners, or DeFi protocols, might be interesting.

New Financial Primitive

Today, two primary protocol primitives—market making and lending—drive the vast bulk of activity in DeFi. However, such factors alone are insufficient to create a robust financial system.

There is an urgent need for new financial primitives in DeFi that can compete with the widespread use of AMMs and lending protocols.

The importance of derivatives in capital efficiency and risk management makes them a natural candidate for inclusion in DeFi’s expanded collection of financial primitives.

Protocols like Ribbon and GMX have demonstrated the promising future of the DeFi derivatives market.

However, most DeFi-derived protocols have not yet seen widespread adoption, and the field may undoubtedly benefit from further development.

TradFi Bridges and the Real World Uses

DeFi has stayed a crypto-to-crypto market in the last two years with very little access to off-chain apps.

Even though the focus on crypto has helped speed up innovation in the area, it also makes DeFi less stable as a financial market.

For example, stable returns on financial markets don’t just come from imbalances in the market.

They can also come from businesses that do valuable things in the real world. DeFi needs to make something similar happen again.

Building bridges to standard finance (TradFi) applications can give DeFi a new wave of usefulness, leading to new ways of doing money-related things.

By giving loans to financial companies, protocols like MakerDAO have been trying out ideas in this area.

Final Thoughts

DeFi is, without a doubt, the new big thing in the finance industry, with its advantages more than its disadvantages.

With a few advancements made in DeFi’s structure, it is set to dominate the financial space.

The Benefits of Decentralized Finance (DeFi) for Crypto Investors

What is DeFi?