The crypto and blockchain industries have developed exceptional innovations in the last couple of years. One of their most significant and impactful innovations circumvents centralised or traditional finance as we know it.
In a short time, decentralised finance (DeFi) has grown to become one of the top trends in the blockchain industry, with new services popping up in this niche.
According to CoinMarketCap, the DeFi industry is worth $46 billion today. As the industry grows and expands its reach, more people flock to invest in it.
In this article, we’ll explain what DeFi is, why so many people are investing in it, and if you should also invest in it.
But first …
What is DeFi?
DeFi stands for decentralised finance and is a blanket term for financial activities and services that operate on blockchain technology without the help of third parties.
When most people talk about DeFi, their scope is often limited to P2P loans and transactions, but DeFi is much larger than that. All the financial services you can think of, including asset management, land, insurance, investment, trades, and payments, all fall under DeFi as long as they occur on the Blockchain.
Should You Invest in DeFi?
Not only did DeFi provide a solution that was much needed and well-embraced by people, but it also created an ecosystem for growth and investments. In just a few years, so many investors had flocked into the DeFi market, hoping for a piece of the ever-growing pie.
Part of what makes DeFi this interesting is the absolute lack of regulations. It’s the financial wild west. But even that is risky, as many investors who fell into DeFi investing headlong have found out.
The risks are almost as damaging as the rewards are fulfilling. This then begs the question – is investing in DeFi worth a try? You can weigh the advantages against the risks and find out for yourself.
Benefits of Investing in DeFi
DeFi thrives on the benefits that traditional finance can’t offer. Here are a few of them:
Transparency
One thing that traditional finance lacks a lot is transparency. As has been proved by the millions of people around the world adopting DeFi, transparency is an important benefit of DeFi.
All transactions on the Blockchain are open and verifiable to all users. In traditional finance, no one knows that transactions truly occur and that builds distrust over time. Transparency in DeFi, on the other hand, builds trust amongst users and encourages others to participate.
Total Ownership of Assets
With crypto wallets, users cannot only access their assets but also control them themselves. In contrast, banking apps let owners see their assets while the transactions are managed by their bank. With DeFi, everyone has actual ownership and control over their assets.
DeFi protocols are Open Source
DeFi uses a lot of protocols, and the best part is that these protocols are open-source. Everyone can view, audits and even use them as a blueprint for building other great applications in the DeFi space. These protocols can be combined in multiple ways to provide new services.
Transactions are in Real Time
Miners verify blocks of DeFi transactions in real time. It takes 10 minutes or less for blocks of transactions to be confirmed. For users, transactions are immediate, and updates to interest rates are refreshed every minute.
Use of Smart Contracts
DeFi offers services that require a third-party body to oversee and implement agreements. Banks and other entities take on this role in traditional finance, but in DeFi, smart contracts handle it.
Smart contracts are computer codes that oversee and execute agreements when the conditions are met. They are very reliable, transparent, and unbreakable. But best of all, they require no monitoring.
Data from DeFi is Secure
One of the most significant selling points of DeFi is the Blockchain. Blockchain technology sponsors the distributed database of transactions which is decentralised and connected to so many nodes that cannot all be hacked at once.
The result of this is data security and anonymity.
Higher than Normal ROIs
Investors in DeFi are making a ball. The interest rates for investing in DeFi are higher than what you’d get in traditional finance, and here’s why. In centralised finance, the profit on every investment made with your money is split between you, the customer, and the bank itself.
When all is said and done, investors only get a fraction of the actual ROI on their investment.
With apps like Valktech that help investors maximise their investments for the maximum amount of profit, DeFi investments yield high ROIs.
Low Barrier Entry
To invest in traditional finance, one has to run through a few hoops. DeFi’s permissionless method of operating removes the power of centralised parties like banks to endorse transactions and charge a fee for them.
Other barriers to investing in traditional finance include geographical location. In DeFi, the barrier to entry is low. As long as you have an internet connection and a crypto wallet, you can participate in DeFi services.
Risks of Investing in DeFi
Need for Private Keys
Private keys pose a problem, especially for investors managing accounts on different wallets. To gain access to your wallet and assets, you’ll need to memorise a long and random unique code. You’ll lose access to all your investments and assets if you can’t remember this code.
Threat of Hackers
Data stored in the Blockchain database might be too protected to be hacked, but the rules are a bit different for DeFi networks and apps. The funds in these places are protected by smart contracts that are near impossible to hack. However, glitches in the code of smart contracts present vulnerabilities for bypassing the rules. Many DeFi investors have lost their funds to these vulnerabilities.
DeFi is a Relatively New Space
Despite its impressive growth, DeFi is still a relatively new industry, so there is still much room for trial and error. This boil down to one thing: risk. The lack of experience-born stability in the DeFi space increases the risk margin for investors. Currently, the risks for investing in DeFi are pretty high and will remain high until the space grows and develops enough to avoid certain pitfalls.
The other side to the high risk is high ROI. The newness of DeFi also means disproportionately high levels of profit and losses. Even the possibility of such high ROI is a risk as well.
Future of DeFi
Much of what makes DeFi very attractive to investors is the lack of regulation that increases risks and rewards. As exciting as it can be, one thing is sure, the unregulated run for DeFi is about to come to an end.
The governing bodies in the financial services industry are calling for some regulatory bodies. Despite the moves made to regulate some parts of DeFi, nothing has been done yet.
No one has determined who should regulate DeFi and what these regulations would ultimately be. But it won’t be long before regulatory bodies find themselves here with rules and limits.
If you’re interested in investing now, regardless of the risk, Valk has a solution for you. With Valk, new and old investors can reduce risk and maximise profit. Valk’s Merlin app provides smart DeFi services that use data analytics to help investors make smart investment decisions.
Conclusion
Knowing what you know about DeFi, should you invest in it? There is no clear-cut answer to this particular question. Only you can decide if the rewards far outweigh the risks enough for you to invest in it.
Disclaimer: This article contains sponsored marketing content. It is intended for promotional purposes and should not be considered as an endorsement or recommendation by our website. Readers are encouraged to conduct their own research and exercise their own judgment before making any decisions based on the information provided in this article.
