DeFi is short for “decentralized finance,” an umbrella term for a variety of financial applications in cryptocurrency or blockchain geared toward disrupting financial intermediaries.
DeFi draws inspiration from blockchain, the technology behind the digital currency bitcoin, which allows several entities to hold a copy of a history of transactions, meaning it isn’t controlled by a single, central source. That’s important because centralized systems and human gatekeepers can limit the speed and sophistication of transactions while offering users less direct control over their money. DeFi is distinct because it expands the use of blockchain from simple value transfer to more complex financial use cases.
Bitcoin and many other digital-native assets stand out from legacy digital payment methods, such as those run by Visa and PayPal, in that they remove all middlemen from transactions. When you pay with a credit card for coffee at a cafe, a financial institution sits between you and the business, with control over the transaction, retaining the authority to stop or pause it and record it in its private ledger. With bitcoin, those institutions are cut out of the picture.
Direct purchases aren’t the only type of transaction or contract overseen by big companies; financial applications such as loans, insurance, crowdfunding, derivatives, betting and more are also in their control. Cutting out middlemen from all kinds of transactions is one of the primary advantages of DeFi.
Before it was commonly known as decentralized finance, the idea of DeFi was often called “open finance.”
Pros and cons of DeFi
The rising popularity of DeFi and other cryptocurrency make it seem like an attractive investment. But it’s important to understand what you’re getting into before taking the plunge, and understand the benefits and drawbacks.
“In DeFi you hold your money, you control where your money goes and how it’s spent. DeFi is efficient, since everything is programmable, in a click of a button you can perform complex transactions,” explains Mozgovoy.
The accessibility factor can remove some barriers, but there are a number of cons to be aware of.
“DeFi is new and experimental. Since everything is code, it can have bugs. Bugs lead to money loss or hacks. DeFi is new and complicated,” says Mozgovoy. “User experience can still be rough. Learning curve is still steep, but it will change.”
All investing comes with some level of risk and DeFi is no different. But any cryptocurrency or DeFi application may have a higher level of risk due to difficulties with regulation (though the SEC is looking to fix that) and potential scams. A good rule of thumb is to not invest any money you can’t afford to lose.
How to invest in DeFi
If you’re interested in investing in DeFi, there are a number of ways to do it.
“To start in DeFi you need native currencies — like ETH, AVAX, BNB, FTM, MATIC and others — as every transaction will require gas. You can purchase those through various exchanges, wallets, and crypto services,” explains Mozgovoy.
You can start with a decentralized exchange (DEX) such as Uniswap and Arken Finance. According to their site, you can “Swap, earn, and build on the leading decentralized crypto trading protocol.”
It’s important to keep in mind that since everything is relatively new with DeFi and there is no governing body, be careful about what you invest in.
“In DeFi anyone can launch their own project, token, contract — that is why you should be aware of scams and low quality projects,” notes Mozgovoy. Aside from being aware of scams, in practicality, Mozgovoy states that with DeFi users can save, lend, or take part in derivatives and exchanges.
