Posted in:

Everything You Need to Know WhenInvesting in DeFi

Maybe you’ve been hearing DeFi, or you’ve been following the updates, and you can’t help but wonder what has made it so popular. Or you are planning on investing in its community, but you need a reason. Here’s your chance of knowing everything about DeFi. Like every other ecosystem, decentralized finance is under the crypto community as a subset of the entire blockchain technology, so a central body does not govern it. Hence, decentralized. DeFi was the main story for last year in the entire crypto space, and this year, it would remain a bigger story because of how huge the community is becoming. 

What is DeFi?

DeFi (Decentralized finance) is a digital peer-to-peer financial service that allows crypto trading, interest account, and loan across other services. Its main reliance is on the Ethereum network, although other cryptocurrencies are beginning to see how lucrative the DeFi ecosystem is getting. There are even Bitcoin DeFi protocols popping up now. So, in a nutshell, DeFi aims to cut every form of financial intermediaries and replace them with smart contracts, which are codes that have been pre-written and deployed on the network for the execution of transactions. With DeFi, transactions are faster and cheaper with no paperwork included, irrespective of the number of transactions being carried out. 

The growth of the DeFi ecosystem

The growth of the DeFi ecosystem could be traced back to 2022. It started when the entire DeFi market cap grew from $700 million in December 2019 to about $13 billion in December 2020. Since then, DeFi investments have been growing, as well as its market capitalization. The growth of the DeFi ecosystem as it December last year was about $40 billion, meaning there’s a continual yearly increase in the market cap and adoption rate of DeFi. However, it is worth noting that DeFi has been in the crypto space since 2013, with its first initial coin offering Omni. Right now, the growth of DeFi has become one in which all projects are now looking forward to hopping on. Stablecoins and ICOs were important tools in the growth of decentralized finance. 

Regulation is imminent

One of the keynotes regarding the DeFi space is the issue of regulation. Before now, it used to be possible that there could be DeFi regulation, but right now, it’s certain. Various bodies have raised the need for additional control in the DeFi ecosystem. One of the major reasons for this regulation was that DeFi doesn’t have customer protection, unlike the traditional method. Also, DeFi could be easily used to facilitate money laundering without the know-your-customer and identity management. Hence, the issue of regulation of DeFi investment has become heightened. So, it’s advisable that as a DeFi investor, ensure you have your tax records up to date and your transaction history so that your portfolio doesn’t get carried away by regulation. DeFi is awesome, but with regulation, it might mean a minor setback in the growth of the DeFi ecosystem irrespective. It is important that you keep yourself updated with recent news in the DeFi space. 

There are several means of earning on DeFi

As mentioned earlier, decentralized finance is a huge ecosystem with several DeFi investments cut across all communities. The value of the DeFi tokens has grown thanks to exponentially increasing user adoption of the DeFi ecosystem. Note that with DeFi, you can earn passive income from your asset. As mentioned above, parts of DeFi investments include borrowing and lending, liquidity provision, and yield farming. In all of these branches, you earn passively. This means that, if you have assets, you can add them to liquidity pools, stake them as in yield farming, or lend others in the form of loans for return in a given period. Depending on the one you choose, the rewards are great with little or no stress. Since the smart contract anchors the entire DeFi process, you don’t need to do much work or technical analyses like the actual trading. All you need is your asset and the right project, and you are good to go. 

Note that DeFi investments are risky because of the price volatility of the crypto space. So, in all of these investments, always consider the risk involved and invest accordingly. Yield farming on DeFi has the largest returns, but so is the risk associated with it. You could lose your assets the same way you can make a fortune easily. Liquidity providers are prone to impermanent losses; so ensure you do your research before engaging in DeFi investments.