DeFi – more crypto terms made easy
In finance, there never seems to be a shortage of acronyms and new terms. Over the last year or so you might have heard the term DeFi. It has been a primary driver of the crypto asset sector and the EasyCrypto10 index – our cool partners over at EasyEquities – since it gained traction in 2020. What is DeFi exactly and why does it matter? This is what the EasyCrypto team have to say:
DeFi, short for “Decentralized Finance”, refers to financial services and applications carried out on a blockchain. Finance that runs on a blockchain embody financial services with no central authority.
Deliberations of what constitutes traditional financial services may bring a few institutions to mind; banks, credit providers, insurers and stock exchanges. Now if you take them and the services they provide and apply decentralized cryptography, you get DeFi.
Below are a few prominent examples of DeFi, with many more in the development pipeline.
Lending and lending platforms: In the same way you would put your money in a fixed deposit to receive interest, so too could you earn interest on your digital assets.
The reverse is also available if you want to borrow digital assets and pay interest on your loan. Warning! The idea is the same as traditional finance but from a risk standpoint DeFi is still extremely risky. A smart contract running on a blockchain in the place of a middle man like a bank or credit provider is what is allowing borrowers and lenders to participate in an open and decentralised system.
Decentralized exchanges: Decentralized exchanges are exchanges that operate without an intermediary. Traders and investors can connect directly with one another to trade in a “trustless” environment. Assets traded are never held in a central wallet, like centralized exchanges.
Decentralized exchanges have substantially grown in volume, and have their own tokens like Uniswap, which is even included in the EasyCrypto10 bundle. Decentralized exchanges are different from centralized exchanges which are custodial , whereas centralized exchanges hold your assets for you.
Prediction Markets: A prediction market allows participants to make bets on the outcomes of future events. These markets function like traditional prediction markets — but with blockchain functionality, which eliminates a middle man.
Yield farming: This is the process of staking assets in exchange for a reward. Yield “farmers” stake or lock up their assets in a smart contract liquidity pool. In exchange for providing this liquidity, they are rewarded. The incentives can be a percentage of transaction fees, interest from lenders or a governance token.
Stablecoins: How do you interact with the crypto economy? Moving money via Stablecoins is faster, cheaper and easier in the crypto economy than using fiat currency. Along come Stablecoins. Stablecoins peg a crypto to a non-crypto, the most popular being the U.S. dollar. This process of keeping the price under control is where DeFi takes the stage. As the name implies – Stablecoins aim to bring price “stability” .e.g. keeping the price of 1 Stablecoin = 1 USD.
It is important to understand that investing in DeFi is extremely risky. The list is incredibly long of projects that have crashed and burned with investors losing everything. Like any new cutting edge technology this is to be expected, but the rewards to be unlocked are immense. You can spread your risk and indirectly and passively participate in DeFi. The EasyCrypto10 bundle currently includes ETH, ADA, BNB, SOL, POL, and UniSwap and offers exposure to the crypto asset technology on which DeFi runs on.
For more crypto news, go to https://www.easycrypto.co.za/blog