While our world seems to be undergoing lots of economic uncertainty, the world of decentralization is blossoming. And this does not only entail the growing number of people who choose to purchase bitcoin and other cryptocurrencies. It is mostly related to the application of blockchain technology, the foundation of cryptocurrencies.
In this article we discuss the progress made in decentralized finance, and why it is so important for the future. DeFi is now part of our lives, even though only highly technical people know how to use it to their advantage.
While we will not be delving into the exact steps on how to use independent protocols, we will discuss a little bit about their history, potential applications, and how the future might change in the next few years. Let’s delve in.
What is DeFi?
DeFi is the collective total of financial applications that are fueled by blockchain technology and are fully decentralized. There are many complex names and terminologies that refer to this term and its subdivisions, but essentially what they attempt to do is:
- Allow you to trade cryptocurrencies without a certain authority; a concept here known as Decentralized exchanges. The most popular options for this are either Uniswap, which is Ethereum-based or Binance Smart Chain, which is based on the BNB blockchain.
- Allow you to take loans in form of cryptocurrency, which here happens through smart contracts that have a large number of parameters. There are many decentralized protocols that offer such services, including Aave, Maker, Compound, and others.
- Help you earn interest on your tokens for providing liquidity. This is by far the most popular option for investors who would otherwise simply hold onto their tokens. These people add their tokens to a pool that then lends them out to those who want to take loans. In turn, they pay an annual interest that is hundreds or even thousands of times higher than that seen in the traditional banking system.
- DeFi infrastructure & cross-communication tools. In short, the goal here is to help different protocols communicate with each other in a better way. This is done with the implementation of oracles like Chainlink.
Why did DeFi grow in popularity?
To understand DeFi we need to first look at Ethereum. The popular cryptocurrency project was built to enable anyone the ability to build decentralized applications (whether financial or otherwise), in order to improve the space and continue growing it towards a fully decentralized future.
The first applications of this were mainly focused on gaming and exchanges. Gaming on the blockchain enables people from third-world countries to generate a source of income that is not tied to the banking system, which for the first time gave them back their individual power. Exchanges, on the other hand, served their purpose in the past, but are increasingly become dangerous as they are controlled by governmental third parties. An easy way to see this is by seeing the regulations surrounding KYC, the negative response from banks, and the limitations posed by using these instruments.
So how will this technology change the future?
The harmony of the world stands upon a foundation of privacy. And as long as privacy tools and systems continue being built, our freedom can be conserved. This is why DeFi is the most important technology, not only for 2021 but possible for the whole century. In short, it enables anyone to take control back into their hands by removing the need for a bank.
- Savings are safest when stored in hardware wallets.
- Borrowing and lending is best done through smart contracts
- Interest earned in DeFi protocols can often be higher than 30-40% per year.
- The space is still in its very infancy
In many ways, the future seems promising, which is why you should prepare for it accordingly. And here are a few ways to get you there.
How to best prepare
While it may seem somewhat challenging, especially for older generations, it is important that you learn how DeFi protocols work. It is also important to start testing decentralized exchanges. Their UI/UX is not the most user-friendly, but their product is one of the most important developments of the past few years.
Next to this, it is important to learn how yield farming works, the risks it poses, and how it can affect the price of cryptocurrencies. The concept can also be found on exchanges like Binance, so make sure you read through their literature.
Finally, you should remember that the revolutionary technological process is never linear on an exponential basis. There will be volatility, possibly even condemnation from institutions that benefit from the way things are currently done. We saw that multiple times with Bitcoin over its past 12-year history. The trick is to educate yourself and always follow the latest developments to stay up to date.