DeFi is an acronym for Decentralized Finance. This generally refers to digital assets, smart contracts, protocols, and DApps (decentralized applications) that are built on Ethereum. DeFi is financial software built on the blockchain that systematically pieces together like money blocks.
Time To Jump On The DeFi Bandwagon?
DeFi native tokens have outperformed other cryptocurrencies in the past month. MKR bottomed at $190 in March and rallied 3x in just 90 days. DeFi is similar to centralised exchange tokens. So DeFi native tokens benefit and gain value from increasing usage of the exchange or service provided by the protocol.
While 2019 was a great year for centralised exchange tokens because of massive demand for IEOs and the emergence of new futures & derivatives, the chart below demonstrates a new cycle where DeFi native tokens are playing catch-up to centralized plays.
What Are DeFi's Biggest Hurdles?
Liquidity and accessibility have been key hurdles for most DeFi projects, but we can see this is being alleviated with the introduction of futures. For example, FTX listed perpetual futures for KNC (Kyber Network), allowing traders to take long or short positions with up to 100x leverage. The market reacted positively and KNC/BTC is now testing new highs for 2020.
A lingering risk lies in security issues. Chinese DeFi protocol, dForce, lost $25m of users’ funds during a hack in April. While authorities were able to track the IP and recover the funds, such events still keep a fair share of users away.
What Makes DeFi Different From Other Cryptos?
Decentralized Finance intends to build a financial system that is accessible to everyone and removes the need to trust and rely on central financial authorities. The technology to achieve independence from central authorities is already here. Namely the internet, blockchain, and cryptography. In traditional finance we rely on 3rd party central authorities to verify transactions. However, in the context of the blockchain and cryptos, the users can verify transactions. Some may say this is in line with one of the core values of cryptocurrency, “Financial Freedom”.
Who's Using DeFi?
The greatest opportunity of DeFi is that it can literally benefit everyone who can access it. Traditionally central authorities such as governments and banks have issued currencies that underpin our economies. People trust these authorities to manage and provide regulation for the supply and circulation of currency. Overtime, societies have place an enormous amount of trust into these institutions ultimately giving them unfettered power over currencies.
The expectation is for people to trust the government not to print too much money. We expect the banks to safeguard and store our money. And we trust institutions with our investments and assets. The reality of the current situation is that this trust is objectively undeserved. “Absolute power, corrupts absolutely” and with the current climate of unlimited quantitative easing and printing endless money. DeFi provides a much needed solution for people to reclaim their financial freedom and unshackle themselves from the traditional financial system.
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