If you’ve dipped your toes in the world of cryptocurrency, then one of the most important terms you need to understand is DeFi, or decentralized finance. That’s because not only is DeFi a new addition to the cryptocurrency lexicon but it’s use-case is destined to reach far beyond the current lending and trading sectors it currently works in. Don’t be flustered yet, we’re here to explain everything you need to know about DeFi and how you can invest using this technology.
Define DeFi -
Before we talk about DeFi, let’s first talk about Ethereum, the platform on which most of the DeFi projects are built. Ethereum is a decentralized open-source blockchain that also contains its own cryptocurrency Ether that can be used to transact on the platform. Released in July 2015, Ether is second only to Bitcoin in terms of market capitalisation today.
DeFi, on the other hand, is the term used to describe financial applications built on blockchain technology, which in turn aims to democratize the economic landscape by replacing centralized institutions such as brokerages, banks or exchanges.
DeFi draws its inspiration from blockchain, the technology that powers Bitcoin, Ethereum and other cryptocurrencies, in which a collective group of entities holds the records of transactions in lieu of a single entity. DeFi, however, expands the scope of these transactions from simple transfers to more complex financial use cases.
These DeFi applications that are used to make complex financial transactions are inevitably built on the Ethereum framework, the world’s second-largest cryptocurrency and blockchain system. This is made possible because of Ethereum’s preference for smart contracts, which executes transactions automatically if certain pre-determined conditions are met.
One nagging issue surrounding DeFi is the high gas fees users have to pay for even simple transactions. On the Ethereum blockchain, gas fees are payments made by users to compensate for all the heavy-duty computing energy required to process and validate transactions. Thankfully, a solution is expected to roll out with the upcoming Ethereum 2.0 framework, making DeFi transactions all the more popular in the months to come.
Investing in DeFi -
Today, DeFi platforms and apps can provide you with a full spectrum of financial services. These range from trading, lending, decentralized exchanges, borrowing, asset management and much more.
There are many ways you can invest in DeFi and earn more crypto. The three most popular investing options are Buy And Sell Tokens, in which you buy DeFi currency at a lower price and sell it when the price goes up, as most cryptocurrencies eventually do.
The second method is Interest Earning wherein you join a lending platform and provide your funds to inject liquidity and earn interest from borrowers. Keep in mind that you always cross check the platform before offloading your funds.
The third popular way of investing revolves around Yield Farming where you move your crypto assets between different projects and provide the network with the required liquidity to carry out transactions while you earn interest.
Top DeFi Coins –
If you’re looking to invest in DeFi, keep an eye out for coins such as Uniswap (UNI) that’s dominating the DeFi market. Launched in September 2020 at the rate of $2.94, the coin has seen incredible growth and surged over 1100% and is now priced at $35.80 and a market cap of over USD $18 billion.
Chainlink (LINK) is another popular DeFi Coin and is known for feeding real-world data to smart contracts on the blockchain. If you’re keen on investing in any DeFi coin, do take a look at LINK that has outperformed the broader cryptocurrency market in 2021.
Fantom (FTM) is another coin that’s made a mark in the DeFi space, thanks to its scalable smart contract platform that enables the creation of decentralized applications (dApps) and digital assets. FTM coin started the year at the price of $0.018 and currently trades at $1.79 in September 2021, implying a return of over 5000% from where it began.
Aave (AAVE) is another popular DeFi coin that has quickly come to be known as the world’s bank by crypto enthusiasts and is used as a high yield savings account for their cryptocurrency and stablecoins.
Finally, one last coin among many DeFi coins to consider is Dai (DAI), which pegs its value to the US Dollar and avoids the volatility of the crypto market altogether. With a m-cap of over $4 billion, DAI is one of the best and most popular DeFi coins you can look at if you want to invest without taking on too much risk.
Now that you know all about DeFi, it’s your turn to make a move and invest in this new cryptocurrency format. Be sure to start your crypto journey with the right platform such as WazirX to make the best possible use of upcoming technologies.