Imagine jumping back to the 1960s when computers and the Internet were not widely accessible to a typical person for everyday use. It might seem attractive at first glance, but if you were forced to stay there, can you imagine living without a computer? New technologies offer opportunities, which make it harder to think of a day without them. For those familiar with the immense possibilities of decentralized finance (DeFi), imagining a world without it may not be possible anymore. DeFi is now intertwined with our lives with its countless services and opportunities. If you wonder how investment in DeFi can be a good catch, this article is for you.
Investing in Decentralized Finance: Is DeFi A Good Investment?
DeFi is a very fast-growing sector of blockchain technology that has attracted a lot of attention in recent years. By the end of 2021, the total value locked (TVL) in DeFi protocols hit a record of $110 billion, which shows its high potential. Many believe that DeFi is the future of the world economy, which offers new opportunities like yield farming, staking, liquidity mining, and much more. Let’s review some of these investment opportunities.
- Yield Farming
DeFi investors can opt for yield farming, another way of earning interest in DeFi. Yield farming, sometimes called liquidity farming, is locking up your cryptocurrencies in DeFi protocols in exchange for interest, calculated by Annual Percentage Yield (APY). The yields could sometimes reach triple digits at the market’s peak in 2020-2021! Some may confuse yield farming with staking, but these concepts have different features and characteristics.
In yield farming, users lock and invest their cryptocurrencies to earn more money. This strategy requires investors to share some assets in a liquidity pool based on smart contracts. This pool helps the DeFi protocols (mainly DEXes) to get the capital they need, and their share of trading fees is transferred to the user through rewards.
Find the best yield farming opportunities on CrowdSwap App.
- Lending and Borrowing
Today, DeFi protocols have replaced the role of intermediary financial institutions. In other words, DeFi users can now borrow, lend, and conduct transactions without needing a financial institution as an intermediary. Lending cryptocurrencies through DeFi protocols is a way of earning passive income. Platforms like AAVE, MAKER, and KAVA offer up to 20% APY yields for those who provide liquidity. This yield is much higher than the average banking system interest, and that’s why it has attracted a lot of investment. Plus, the convenience of such protocols for lending and borrowing procedures has made them so intriguing.
In traditional finance, a loan is given to a borrower willing to repay the loan, along with its interest. The borrower receives the loan when needed and repays it with interest on the specified date. Decentralized loans work precisely the same way. The only difference is that DeFi lending protocols use intelligent contracts to take collateral from borrowers and provide a profit plan to the lenders. In the traditional economy, banks and financial and credit institutions usually give interest to individuals and businesses who open savings accounts and allow the bank to use their deposits for other transactions.
- DeFi Staking
Staking is a method that allows users to earn passive income by locking their tokens in a smart contract and gaining more of the same token. The process is generally similar to a traditional bank, where the user can deposit their funds. The main difference is in the fewer intermediaries that no longer reduce the user's profit along the way. Users can then receive additional income directly proportional to their available asset balance. The benefits of this method of investing in DeFi incentivize and encourage users to receive a portion as income by locking up assets for a long time. Before investing, ensure you have enough information about the nature of staking and how it works.
Final words
Decentralized finance is introduced to revolutionize traditional banking services by removing the middlemen (i.e., banks) and using new services that run on the Ethereum blockchain. The main idea is that everyone, including those without access to banking services, called the unbanked, should be able to borrow, lend and save money. There is no doubt that DeFi will be the future of the world economy, which has shown a great interest in decentralization and its benefits. Therefore, to cope with the needs of the future decentralized world, knowing how to invest in DeFi is a must.
