24 Jan What is DeFi?
“The Times They Are A-Changin” Bob Dylan once sang, and boy was he on the spot. DeFi came to change everything you knew and expected about finance.
What is DeFi?
DeFi stands for Decentralized Finance, which means that users are able to trade, lend and borrow currency (the crypto kind) free of intermediaries, based on the blockchain system.
Trends have been leading us to a more self-service oriented world for quite a while now and you can see it in the DIY approach many enterprises take now with their customers. People seek autonomy, independence, self-empowerment, decentralization. And if that defines you, DeFi might just be your type of cookie.
A new player in town, this system comes with its own pros and cons. And the latter are to be specially taken into consideration if you are already thinking of cannon-ball jumping into the DeFi pool. A life jacket might come in handy.
What DeFi apps specifically came to change is the fact that users operate without a central service exercising any kind of control over the system, as mentioned earlier. But this comes with perks that some might not have noticed.
For instance, interest rates are lower, as well as the barrier to entry to borrow currency, which makes this space more attractive altogether.
In most cases you only will be asked to offer other crypto currencies as collateral. You can even offer your own NFTs in some cases, making it even easier to back your loans.
As a currency lender you won’t have to deal with bank or service fees, interacting directly with users seeking to borrow.
And maybe the most attractive aspect for investors, you can become a liquidity provider, meaning a user who funds pools that facilitate DeFi transactions, as there are no banks or financial companies to do so here.
But (because there’s always one) as yields seem higher in this game, so are stakes. Ergo, risks are higher as well.
As we all know by now, crypto currency isn’t necessarily a synonym of stability. And the Internet, “Oh Baby, It’s a Wild World”.
Risks are a huge factor to consider when entering the DeFi realm, and these can be divided in 3 groups.
Technology risks may come from bad coding, just the slightest error in a developer’s code writing can make the system vulnerable to hacking, something that has already happened in the DeFi arena.
There’s also the volatile aspect to look at. Since other crypto currencies can be used as collateral, were these to suffer from instability would make you vulnerable as a lender to asset risk, as borrowers wouldn’t be able in such scenario to pay their loan debt.
And having no bank or financial company control whatsoever also brings about product risk, with the lack of insurance or regulations which might facilitate fraud situations.
Improvements in those areas should be top priority now that DeFi is catching up to its competitors, rising in the ranks as an attractive player for those willing to bet on it.
What can you do with DeFi?
One of the best ways to find out the potential of DeFi is to see a comparison between decentralized versus traditional finance.
Why should you embrace DeFi?
As the world evolves post pandemic, we are slowly beginning to understand that cryptocurrencies are here to stay.
An interesting case to address is the retail sector. Can cryptocurrencies now set foot in the eCommerce world?
With the retail sector experiencing tectonic shifts in activity in recent years, DeFi could combine to provide novel solutions to persistent issues and improve the experience of online shopping for everyone involved.
Suitable payment options are a decisive factor in customer satisfaction and long-term customer retention in the eCommerce field.
According to a survey by Paysafe, it is only a matter of time until cryptocurrencies become a regularly offered payment method in online stores. Out of the decision makers surveyed, only 15% state that they are not planning to offer cryptocurrencies in their online stores in the future at all. 17% already accept cryptocurrencies, but the overwhelming majority of 72% plan to implement cryptocurrency payment at least within the next three years.
General attitudes towards cryptocurrency payment are mostly positive: 59% of payment decision makers in small and medium-sized online businesses expect the implementation of cryptocurrencies as a payment method to open up new international markets for their businesses. 54% even state that in their view, cryptocurrencies are the future of payments.
The DeFi based-protocol for E-commerce platforms is the future of the digital shopping experience for millions of users globally. The digital E-commerce platform in DeFi is trending and has more advantages for transactions and delivery to happen more securely.
DeFi has the potential to address many of the flaws in existing financial systems, including giving the unbanked population access to a financial system.
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